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 What is Fixed Assets?

Fixed Assets

-Long term assets

-Use in normal business operations
-Not for sale in normal operations
Mxample

Land
Building
Plant
M uipment
Machinery
Úypes of Fixed Assets

Úangible Fixed Assets

Intangible Fixed Assets

 Úangible assets

-Physical Mxistence
-Úouchable

Mxample
Land, Building, Machinery
Intangible Assets

-Use in business operations

-No physical existence

Mxample
Patents, Copy rights, Úrademarks,
Goodwill
Accountable events in fixed assets

Ac uisition

Allocation of the ac uisition cost to

expense over the asset¶s useful life
(Depreciation)

Sale or Disposal
Ac uisitions of Fixed Assets
Cost includes all expenditures from
purchasing to ready to use.

Mxample

-Sales tax on purchase price,

-Delivery Cost,
-Installation Cost
 Determining Cost

List Price Rs. 10,000

Sales Úax Rs. 600
Úransportation Charges Rs. 1,250
Installation Cost Rs. 400

Úotal Rs. 12,250

 Special Consideration of Fixed
Assets
Land

-Incidental cost incurred like

Commission to real estate brokers
Legal Fees for examining the title
Fees for Surveying
Draining
Clearing
Incase land purchase as a old building on it
so cost charge to land.
Building
If building is purchase with the
intention of repairing them prior to
placing them in use.

-Repair charges before using the

building if incurred.

-Repair Charges after building

placed in use.
 Depreciation
A decline in the value of fixed assets.

Allocation of the cost to expense in the

periods in which services are received.

Gradual decrease in the efficiency of an

asset because of its usage.
Nature of Depreciation
Fixed assets lose their ability over time to
provide services.

Úhe cost should be transferred to expense

account.

Depreciation is a process of cost allocation

not a process of valuation.

Úhis is non cash expense.

 Causes of Depreciation
Úwo major causes of depreciation:

-Physical Deterioration
Physical deterioration results from use
of assts as well as due to climatic
factors.

-Obsolescence
It means the process of becoming out
of dated or obsolete.
Need for Depreciation

Ascertainment of true profit or loss

Úrue valuation of assets
Replacement of assets
Legal restriction
±ow to Determine Depreciation

Cost of the fixed assets

Mxpected Salvage Value

Mxpected Useful Life

Methods of Computing Depreciation

Straight line method

Declining Balance
 Straight Line Method
Cost of the fixed assets 10500
Mxpected salvage value 500
Mxpected useful life 5 Years

Depreciation= cost - salvage value

estimated life
= 10500 ± 500 = 2000
5
Depreciation charge 2000 per year
 Straight Line Method

Cost of the fixed assets 17000

Mxpected salvage value 2000
Mxpected useful life 5 Years

±ow to calculate Depreciation ?

Depreciation for frictional period
Cost of the fixed assets 10500
Mxpected salvage value 500
Mxpected useful life 5 Years
Assume Asset purchase at October 1then
First year 2000 x 3/12 500
Second Year 2000
Úhird Year 2000
Forth Year 2000
Fifth Year 2000
Sixth Year 2000 x 9/12 1500
10000
 ±alf Year Convention
Cost of the fixed assets 10500
Mxpected salvage value 500
Mxpected useful life 5 Years

First year 2000 x 1/2 1000

Second Year 2000
Úhird Year 2000
Forth Year 2000
Fifth Year 2000
Sixth Year 2000 x 1/2 1000
10000

Úhis approach is used for automobiles, office

e uipments and machinery.