Fixed Assets and Depreciation Accounting

Correct perspective of long term assets or fixed assets They have a useful life of more than a year They are used in the operations of business They are not intended for resale to customers.

Fixed Assets Accounting

Accounting for fixed assets involves dealing with following questions: 1. Determination of cost of acquisition of fixed assets 2. Allocation of cost of fixed assets over its estimated life 3. Accounting of disposal of fixed assets. Cost of acquisition Cost of a fixed assets comprises its purchase price, import duties and taxes on purchase and any other directly attributable costs of bringing the asset to working conditions for its intended use.

Following expenditures relate to the import of a chemical plant: 1. Customs duty on the plant 2. Clearing charge paid to the port trust. 3. Demurrage for delay in clearing the consignment 4. Freight 5. Transit Insurance 6. Repairs of some part damaged while the plant was unloaded at the port.

Some related aspects

Capitalization of Borrowing Costs: Interest paid in connection with the loan paid to acquire any fixed assets is added to the cost of that particular fixed asset till the point of commencement of production. . Such expenditure will be treated as revenue expenditure after commencement of production.

Basket Purchases
Some times a group of fixed assets may be purchased at a single lump sum price. In that case the total purchase price would be allocated among the various assets on the basis of their relative fair value. This fair value is usually determined by professional valuers.

Depreciation
Depreciation is the gradual and permanent decrease in the value of asset from any cause: By Carter Depreciation may be defined as the permanent and continuous diminution in the quality, quantity and value of an asset: By William Pickles

Features of Depreciation
The term depreciation is used only in respect of fixed assets Depreciation is a charge against profits Depreciation is different from maintenance Decrease in value of assets is permanent and perpetual.

Causes of Depreciation Wear and tear Exhaustion Obsolescence Efflux of time Accidentsuses of Depreciation

Depletion: This term is used in relation to natural resources

such as mines, oil wells etc

Amortization: This term is usually used in respect of

intangible assets like patent , copyrights, goodwill etc.

Depreciation Accounting Depreciation accounting is a system of accounting which aims to distribute cost or other basic value of a tangible fixed assets less salvage value (if any) over the estimated useful life of that particular asset in a systematic and rational manner. It is process of allocation and not valuation. Objectives of Providing Depreciation Ascertainment of true profits Presentation of true financial position Replacement of assets Factors affecting the amount of Depreciation
Cost of the assets Estimated scrap Value Estimated useful life

Cost of the asset: This is the cost incurred in making

asset available for use at the first instance. This amount is specific and known at the time of acquisition of the asset. Salvage value: This is the expected sales value of the asset at the end of its useful life. Useful life: It is the period for which the asset can be used for production. Depreciable Cost: This is the original cost of the asset less its salvage value. Book Value: It is the original cost of the asset less depreciation to date. This is also known as WDV .

Method of recording Depreciation

Depreciation can be recorded in the books of accounts by two different methods: 1. when a provision of depreciation account is maintained 2. When a provision of depreciation account is not maintained.

Methods for providing depreciation

1. Straight Line Method or fixed installment method 2. Reducing Balance Method 3. Some other methods Depletion method Sum of years digits method(SYD) method

 Machine Hour rate method Group Depreciation method Depreciation or Sinking Fund method

Fixed Installment method or Straight line method According to this method the amount of depreciation is calculated as follows: Depreciation= cost of asset- scrap value Life of asset Depreciation to be charged can also be expressed as percentage of cost. R = D*100 C For example, an asset has been purchased for Rs 10,000 and it will have a scrap value of Rs 1000 at the end of its useful life of 10 years the amount of depreciation to be charged every year : Depreciation = 10000-1000 10 years = Rs 900 each year or 9%

Merits: This method is simple to understand and easy to apply. Demerits: This method does not takes into account the
effective utilization of assets Total charge for the use of assets goes on increasing from year to year thought he asset might have been used uniformly from year to year.

Diminishing Balance Method

This method is also called as Reducing balance method.According to this method depreciation is charged on the book value of assets each year. For example if the cost of an asset is Rs 20000 and the rate of depreciation is10%, the amount of depreciation to be charged in the first year will be Rs 2000. In the second year depreciation will be charged at 10% on the book value of asset( Rs 18000) and so on.

Advantages:
Total charge for the use of assets remain constant each year. This method is also simple to understand and easy to use. Demerits: It is difficult to calculate the rate of depreciation

JOURNALISING
A Journal may be defined as a book containing a chronological record of transactions. It is the book of original entry/record.

Process of recording transactions in the Journal is called Journalising. Date Particulars (Details regarding accounts which has to be debited and credited) L.F. (Ledger Folio) Debit Rs. Credit Rs.

TYPES OF ACCOUNTS
Rules of debit and credit depends upon the types of accounts involved in the business transaction. Three types of accounts are:1. Personal Account 2. Real Account 3. Nominal Account

PERSONAL ACCOUNTS Personal Account includes the account of persons with whom business deals. Personal Account Natural Artificial Representative PERSONAL ACCOUNTS :Natural Personal Account Accounts of natural persons, e.g. Rams Account, Mohans Account. Artificial Personal Account Accounts of artificial persons, e.g. Account of bank, account of company, account of club. Representative Personal Account Account representing a certain person or group of persons, e.g. outstanding salary account. Rules for Personal Accounts are:-

DEBIT THE RECEIVER CREDIT THE GIVER

REAL ACCOUNT
Tangible Real Account. Accounts of tangible assets, e.g. Cash Account, furniture account. Intangible Real Account. Account of Intangible Assets, e.g. Patent account, goodwill account . Rules for the Real Accounts are:DEBIT WHAT COMES IN CREDIT WHAT GOES OUT

NOMINAL ACCOUNTS
Nominal Accounts include accounts of all expenses, losses, incomes and gains. e.g. Rent account, bad debts account, insurance. When some prefix or suffix is added to a nominal account, it becomes a personal account. e.g. Prepaid rent account Rules for the Nominal Accounts are:DEBIT ALL EXPENSES AND LOSSES CREDIT ALL GAINS AND INCOMES

CLASSIFICATION OF GOODS ACCOUNT Terms goods include articles purchased by the business for resale. Goods account can be classified into following:-

Goods Account:1. Purchase Account 2. Sales Account 3. Purchase Return Account 4. Sales Return Account

Purchase Account This account is meant for recording all purchase of goods. Sales Account This account is meant for recording all selling of goods. Purchase Returns Account This account is meant for recording return of goods purchased. Sales Return Account This account is meant for recording return of goods sold by the customers.

COMPOUND JOURNAL ENTRY

Sometimes there are number of transactions on the same date relating to one particular account or of one particular nature. Such transactions may be recorded by means of single journal entry instead of passing several journal entries. Such entry regarding recording of a number of transactions is termed as a Compound journal entry.

OPENING ENTRY
In case of a running business, the assets and liabilities appearing in the previous years balance sheet will have to be brought forward to the current year. This is done by means of an entry which is termed as OPENING ENTRY. All Assets accounts are debited while all Liabilities accounts are credited. Excess of assets over liabilities is proprietors capital.

LEDGER POSTING
Ledger is a book which contain various accounts. It contains all the accounts of the business enterprise, real, nominal or personal The procedure by which accounts are written up in ledger on the basis of journal is called Posting.

ACCOUNT PROFORMA

Dr
Date

Cash Account
Particulars Rs Date Particulars

Cr
Rs

Trial Balance
Trial Balance is a statement containing various ledger balances or in other words when the various debit and credit balance of the different accounts are taken down in a statement, the statement so prepared is called as Trial Balance

Trial Balance PROFORMA

Trial Balance as on 31st march

Particulars

Debit Rs.

Credit Rs

Errors disclosed by Trial Balance

The disagreement of a Trial Balance indicates the presence of any one of the following errors: 1. Transaction has been correctly recorded in journal but not posted appropriately in both the ledgers 2. Debits are wrongly posted as credit or vice versa 3. If balance of an account is completely omitted from trial balance 4. Balance of an account wrongly recorded in trial balance 5. Wrong totaling Errors not disclosed by Trial Balance Errors of omission Recording wrong amounts in the books of original entry Recording both aspects of a transaction more than once in the books of accounts Errors of recording a transaction on the correct side of the wrong account Some Concluding points : All the real accounts(Asset Account) will have a debit balance. All the accounts of expenses and losses have debit balance whereas all the accounts of incomes and gains have credit balance.All the liability accounts will have credit balance