Financial Accounting - MGT101 Power Point Slides Lecture 17
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Financial Accounting 1 Lecture – 17 Fixed 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.
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Transcript of Financial Accounting - MGT101 Power Point Slides Lecture 17
Financial Accounting
1
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.
Financial Accounting
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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
Financial Accounting
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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
Financial Accounting
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Lecture – 17
Accumulated Depreciation Account – over the years the periodic depreciation is accumulated in this account.
Financial Accounting
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Lecture – 17
Book Value OR Written Down Value (WDV)
Cost of the Asset LessAccumulated Depreciation
Financial Accounting
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Lecture – 17Recording
Depreciation
Debit Depreciation Expense AccountCredit Accumulated Account
Financial Accounting
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Lecture – 17
Depreciation for the year is charged to:i. Cost of Goods Soldii. Administrative Expensesiii. Selling Expenses
Financial Accounting
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Lecture – 17
• In balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. Written Down Value (WDV)
Financial Accounting
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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
Financial Accounting
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Lecture – 17Methods of Calculating Depreciation
• Straight Line Method• Reducing Balance or Written Down Value Method
Financial Accounting
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Lecture – 17Residual Value
• It is the estimated value of the asset at the end of it’s useful life.
Financial Accounting
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Lecture – 17Straight Line Method of Calculating Depreciation
Depreciation = (Cost – Residual Value) / Life of The Asset
Financial Accounting
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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
Financial Accounting
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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
