05 Fixed Assets & Depreciation
Fixed Assets¶
Also called as non-current assets
Long-term assets that can be
- Tangible (Land, Buildings)
- Intangible (Goodwill, Patent, Knowhow)
Importance of fixed assets identification¶
| Financial Statement | Understand | Why important? |
|---|---|---|
| Profit Loss Statement | Expensed | Less profit this year Less Depreciation in Coming years Less assets in Balance Sheet |
| Balance Sheet | Capitalized | More profit this year More depreciation in coming years More assets in Balance Sheet |
Cost of Fixed Asset¶
All expenses necessary to make asset ready for intented use
- Purchase price [Net ie after making adjustment for taxes(excluded), rebates, etc]
- Cost of site preparation
- Delivery and handling cost
- Installation cost
- Training/Professional fee
- Cost of trial run
- Maintanance
Useful life of an asset¶
\[ \text{Useful Life} \le \text{Physical Life} \]
Estimated based on - Expected physical wear and tear - Obsolescence (not used anmyroe - Legal/limits on use assets
Expressed in terms of time period/production units (hrs, km)
Depreciation¶
Means of cost allocation
Depreciation \(\ne\) Valuation
Methods of Depreciation¶
| Straight-line | Declining balance/ Written-Down value | |
|---|---|---|
| Depreciation Amount \(D\) | \(\frac{\text{Original Asset Cost} - \text{Estimated Scrap Value}}{\text{Estimated Life of Asset}}\) | |
| Value at time \(t\) | \(V_0 - tD\) | \(V_0 (1-r)^t\) where \(r =\) depreciation rate |
| Conclusion | Acceptable | Better |
| Salvage Amount | 0 | \(\ge 0\) |
Accounting Treatment¶
| Date | Particulars | Amount | |
|---|---|---|---|
| 1. Entry for purchase of asset | Asset A/C Dr. | ||
| To Bank A/C Cr. | |||
| 2. Entries for providing depreciation at the end of each year | Depreciation A/C Dr. | ||
| To Asset A/C Cr. | |||
| 3. Entry for amount realized on sale of asset | Bank A/C Dr. | ||
| To Asset A/C Cr. |
Reasoning¶
Refer to Accounting Equation
- Asset value inc; Bank (Asset) dec
- Depreciation (Expense) inc; Asset value dec
- Bank (Asset) inc; Asset value dec
Types of Asset Values¶
| Value | Meaning |
|---|---|
| Salvage | Estimated asset value at the end of its useful life |
| Scrap | Actual resale value at the end of its useful life |
| Book | Estimate asset value at any point in time |
At the end of useful life
\[ \begin{aligned} \text{Book Value} &= \text{Scrap Value} \\ \text{Net margin for asset resale} &= \text{Scrap value} - \text{Salvage value} \end{aligned} \]
Law of Marginal Utility¶
\[ \text{Returns from consumption} \propto \frac{1}{\text{Consumption Amount}} \]
Sinking Fund¶
“A sinking fund is an account a corporation uses to set aside money earmarked to pay off the debt from a bond or other debt issue”
- Long-term provision
- Short-term provision