CHAPTER 9: FIXED ASSETS ACCOUNTING

By Annie WPL

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Learning Objectives
Understand the accounting treatments and recording for cash and credit acquisition of fixed assets, disposal and trade in of fixed assets.

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Meaning of Depreciation
Depreciation means reduction in the value of an asset due to frequent wear and tear. It is the process of spreading the cost of fixed asset over the different accounting periods which derive the benefit from their use.

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Causes of Depreciation
Physical deterioration erosion, rust, rot and decay. Wear and tear. Obsolescence. Inadequacy.

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Causes of Depreciation (Continue)

Lapse of time. Accidents. Disuse. Depletion.

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Physical Deterioration
Land may be eroded or wasted away by wind, sun, rain and by other natural calamities. The metals in motor vehicles or machinery will rust away. Wood may rot. Decay is the process which may occur due to the elements of nature or due to lack of proper attention.
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Obsolescence
The term obsolescence means out dated. Due to scientific advancements, the old equipments or machinery may sometimes be replaced by the new ones. This does not mean that the equipment is worn out. Those who cannot afford to buy the new upto-date equipment may still buy the old equipment and use it.
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Wear and Tear

When a fixed asset like machinery, motor vehicle or furniture and fixture are used during the whole year by a business, they may eventually wear out. Some fixed assets may last for many years, but some others may last only for a few years.

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Inadequacy
This arises when an asset is no longer used because of the growth and changes in the science of the business.

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Lapse Of Time
Assets such as lease, copyright, patent etc have a fixed number of years of legal life, after the expiry of which they are rendered useless. Their cost is written of over their legal life and amount charged against revenue every year is known as depreciation.

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Accident
An asset may reduce in value because of an accident. Accidental loss may be permanent but it is not continuing and gradual.

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Disuse
When a machine remains continuously idle, it becomes less and less useful with the passage of time.

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Depletion
The term depletion means the expired utility of a wasting asset. The natural resources such as minerals, oil, timber etc may get exhausted because of exploitation and extraction and the asset becomes useless.

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DEPRECIATION ON FIXED ASSET

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Meaning of Fixed Assets

Fixed assets are those assets which are acquired with the intention to retain in the business. Due to frequent use, they are subject to depreciation. Examples of fixed assets are land and buildings, plant and machinery, furniture and fixtures etc.
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Meaning of Capital Expenditure

Capital expenditure is the expenditure incurred on acquisition of fixed assets. The term capital expenditure includes
The initial cost of acquiring a fixed asset. Other costs associated with the acquisition of a fixed asset (eg legal fees, delivery charges, installation cost etc). The cost of any improvements made to a fixed asset.
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Meaning of Capital Expenditure (Continue)

Note:
1. Any interest paid on loan or other finance charges paid in connection with the acquisition of a fixed asset cannot be treated as capital expenditure. 2. The cost of any repairs made to a fixed asset cannot be regarded as capital expenditure and must treated as revenue expenditure.

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Meaning of Revenue Expenditure

Is incurred on the day to day running cost of the business for example telephone bills, heat and light, salary, advertising expenses etc.

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