Fixed Assets Fixed assets are those assets: that have a long life, Lecture 1 Fixed Assets Fixed assets are those assets: that have a long life, are used in the business for future generation of income, are not bought with the main purpose of resale.

Fixed assets are also called “Depreciable Assets” Lecture 1 Fixed assets are also called “Depreciable Assets”

Lecture 1 Depreciation Cost of the asset is charged to profit and loss account over its life.

Depreciation Depreciation can be defined as follows: Lecture 1 Depreciation Depreciation can be defined as follows: “It is a systematic allocation of the cost of a depreciable asset to expense over its useful life”.

Lecture 1 Useful Life Useful Life / Economic Life is the time period for machine is expected to operate efficiently. It is the life for which a machine is estimated to provide more benefit than the cost to run it.

No depreciation is charged on land. Lecture 1 No depreciation is charged on land.

It is called Amortization. Lecture 1 In case of Leased / Lease Hold Land the amount paid for it is charged over the Life of Lease. It is called Amortization.

Grouping of Fixed Assets Lecture 1 Grouping of Fixed Assets Major groups of Fixed Assets: Land Building Plant and Machinery Furniture and Fixtures Office Equipment Vehicles

Recording Purchase of a Fixed Asset Lecture 1 Recording Purchase of a Fixed Asset Debit Asset Account (relevant classification) Credit Cash / Bank or Payable Account

Recording Depreciation Two different accounts are used Lecture 1 Recording Depreciation Two different accounts are used Depreciation Expense Account Accumulated Depreciation Account

Lecture 1 Accumulated Depreciation Account – over the years the periodic depreciation is accumulated in this account.

Book Value OR Written Down Value (WDV) Cost of the Asset Less Lecture 1 Book Value OR Written Down Value (WDV) Cost of the Asset Less Accumulated Depreciation

Recording Depreciation Debit Depreciation Expense Account Lecture 1 Recording Depreciation Debit Depreciation Expense Account Credit Accumulated Account

Depreciation for the year is charged to: i. Cost of Goods Sold Lecture 1 Depreciation for the year is charged to: i. Cost of Goods Sold ii. Administrative Expenses iii. Selling Expenses

Lecture 1 In balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. Written Down Value (WDV)

Recording the Depreciation Lecture 1 Recording the Depreciation Journal Entry Debit Depreciation Expense Account Credit Accumulated Depreciation Account Presentation Profit and Loss Account Revenue - Cost of Sales - Admin, Selling and Financial Expenses Balance Sheet Fixed Assets - Accumulated Depreciation

Methods of Calculating Depreciation Lecture 1 Methods of Calculating Depreciation Straight Line Method Reducing Balance or Written Down Value Method

Lecture 1 Residual Value It is the estimated value of the asset at the end of it’s useful life.

Straight Line Method of Calculating Depreciation Lecture 1 Straight Line Method of Calculating Depreciation Depreciation = (Cost – Residual Value) / Life of The Asset

Example Straight Line Method Lecture 1 Example Straight Line Method Cost of the Asset = Rs. 100,000 Life of the Asset = 5 years Annual Depreciation = 20 % of cost or Rs. 20,000

Written Down Value Method Lecture 1 Written Down Value Method Cost of the Asset = Rs. 100,000 Annual Depreciation = 20% Year 1 Depreciation = 20 % of 100,000 = 20,000 Year 1 WDV = 100,000 – 20,000 = 80,000 Year 2 Depreciation = 20 % of 80,000 = 16,000 Year 2 WDV = 80,000 – 16,000 = 64,000