ACCOUNTING FOR DEPRECIATIONACCOUNTING FOR DEPRECIATION

Prof. C. P. Gupta

Learning Objectives…Fixed Assets?

Depreciation?

Depreciation, Depletion, Amortization, and Impairment?

Methods of Depreciation?

Accounting for Depreciation

Accounting Standards for Depreciation

Presentation and Disclosures?

Fixed Assets …

Fixed Assets are long-term assets and usually, they have a life more than one year.

Fixed Assets are assets from which benefits are to accrue in future or it provides a stream of future benefits.

Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

Characteristics of Fixed Assets …

Long-term nature

Future benefits

Non-recurring expense

Not held for sale in the ordinary course of business.

Not financial assets

Tangible Assets

Determines the production capacity

Usually, of greater amount

Examples of Fixed Assets …

Capital Expenditure vs

Revenue Expenses

Test your understanding about Fixed Assets …

Identify from the following which are fixed assets and which are not.1. Lathe Machine.

2. Building taken on 50 years lease.

3. Coolants.

4. Share of Subsidiary Company.

5. Car for the CEO for official purposes.

6. Iron steel – sponge

7. Packaging Machine

8. Papers and stationery

9. Machine taken on lease – annaul lease rental Rs. 0.5 million.

10. Coffee Powder purchased by Lavaza.

Cost of Fixed Assets

…A challenge…

Cost of a fixed Assets includes…

All those expenses necessary to incur to

bring the asset into operation or to have its

commercial operation.

The CUT-OFF point is the day of operation;

before that all expenses related to an asset

have to be capitalized; and after that all

expenses have to be treated as Revenue

Expenses related to the assets.Day of OperationBefore, Capital Expense After,

Revenue Expense

Costs of Acquiring Fixed Assets Costs of Acquiring Fixed Assets Include:Include:

Sales tax and freight costs

Installation and assembling

Repairs and reconditioning (used assets)

Testing and modifying

Insurance while asset is in transit

Trial run Cost

Mandatory Spares

Vandalism and uninsured theft

Mistakes in installation

Damage during unpacking and installing

Refundable taxes and duties

Spares Cost – Not Mandatory

Costs of Acquiring Fixed Costs of Acquiring Fixed Assets Exclude:Assets Exclude:

Indicate which of the following items will be taken as part of Fixed Asset Costs.

1. Lease rentals of machines taken on operating lease.2. Insurance premium paid for machinery in transit.3. Cost of creating shed for the installation of a

machinery4. Two years AMC paid for the machine5. Interest Paid during construction of a factory on a

loan taken for this purpose.6. Cost of trail Runs and Quality Test 7. Cost of maintenance department allocated to the

machine8. Fee paid to the consultant for the purchase of this

asset9. Cost of damages occurred during installation of a

machine.10. Cost of import duty paid on a machinery

LEAR

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TEST

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Accounting for Fixed Assets – Purchase and Other ExpensesA machinery is purchased against a cheque of

Rs. 50,000.

A machinery is purchased from XYZ on credit for Rs. 20,000.

A machinery is purchased for Rs. 15,000 and Rs. 5,000 paid for installation.

On the above, Rs. 1,000 paid for conducting necessary trial runs.

Electrician's fee to install a new power outlet required by a new CNC Machine

Where are they shown in the books of accounts?

Depreciation …

Please note that fixed assets

are subject to Depreciation.

Depreciation…

Depreciation is a process of allocating the cost of assets to the period in which the firm receives the benefits from them.

Depreciation involves: …allocating the cost of tangible the cost of tangible assetsassets to expense in a systematic and rational manner to periods expected to benefit from use of its depreciable assets.

Depreciation ………..???

• Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.

Objective behind Depreciation

Fixed Assets are subject to depreciation and thus, depreciation needs to be provided so as to

–Ensure allocation of original cost of a fixed asset over its useful life;

–Ascertaining the true cost of operations; and

– Providing current valuation of fixed assets in the Balance Sheet.