Financial Accounting - MGT101 Power Point Slides Lecture 17

Financial Accounting

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Lecture – 17Fixed 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.

Financial Accounting

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Lecture – 17

• Fixed assets are also called “Depreciable Assets”

Financial Accounting

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Lecture – 17Depreciation

• Cost of the asset is charged to profit and loss account over its life.

Financial Accounting

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Lecture – 17Depreciation

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

Financial Accounting

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Lecture – 17Useful 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.

Financial Accounting

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Lecture – 17

• No depreciation is charged on land.

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Lecture – 17

• In case of Leased / Lease Hold Land the amount paid for it is charged over the Life of Lease.

• It is called Amortization.

Financial Accounting

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Lecture – 17Grouping of Fixed Assets

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

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Lecture – 17Recording

• Purchase of a Fixed AssetDebit Asset Account (relevant classification)Credit Cash / Bank or Payable Account

Financial Accounting

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Lecture – 17Recording

Depreciation• Two different accounts are used

Depreciation Expense Account Accumulated Depreciation Account

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Lecture – 17

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

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Lecture – 17

Book Value OR Written Down Value (WDV)

Cost of the Asset LessAccumulated Depreciation

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Lecture – 17Recording

Depreciation

Debit Depreciation Expense AccountCredit Accumulated Account

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Lecture – 17

Depreciation for the year is charged to:i. Cost of Goods Soldii. Administrative Expensesiii. Selling Expenses

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Lecture – 17

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

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Lecture – 17Recording the Depreciation

• Journal EntryDebit Depreciation Expense AccountCredit Accumulated Depreciation Account

• Presentation• Profit and Loss Account

Revenue- Cost of Sales- Admin, Selling and Financial Expenses

• Balance SheetFixed Assets- Accumulated Depreciation

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Lecture – 17Methods of Calculating Depreciation

• Straight Line Method• Reducing Balance or Written Down Value Method

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Lecture – 17Residual Value

• It is the estimated value of the asset at the end of it’s useful life.

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Lecture – 17Straight Line Method of Calculating Depreciation

Depreciation = (Cost – Residual Value) / Life of The Asset

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Lecture – 17Example 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

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Lecture – 17Written 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