Non Current/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.
not easily and quickly convertible into cash
Fixed assets are also called
Depreciable Assets
Fixed Assets Register

Different record for each class of assets
Date of purchase
Detailed particulars of asset
Location of asset
Record of depreciation
Depreciation
IAS-16 defines depreciation as the measure of
the cost or revalued amount of the economic
benefit of the tangible non current asset that has
been consumed during the period
In simple words it is the cost of using a non current
asset
It is a systematic allocation of the cost of a
depreciable asset to expense over its useful life.
Note: No depreciation is charged on land.
Useful Life
Useful Life / Economic Life is the time period for asset is
expected to operate efficiently.
It is the life for which an asset is estimated to provide more
benefit than the cost to run it.
Grouping of Fixed Assets
Major groups of Fixed Assets:
Land
Building
Plant and Machinery
Furniture and Fixtures
Office Equipment
Vehicles
Recording
Purchase of a Fixed Asset
Debit Asset Account (relevant classification)
Credit Cash / Bank or Payable Account
Recording
Depreciation
Two different accounts are used
Depreciation Expense Account
Accumulated Depreciation Account
Accumulated Depreciation Account over the years the
periodic depreciation is accumulated in this account.
Book Value OR Written Down Value (WDV)

Cost of the Asset
Less
Accumulated Depreciation
Recording
Depreciation

Debit Depreciation Expense Account
Credit Accumulated Account
Depreciation for the year is charged to:
i. Cost of Goods Sold
ii. Administrative Expenses
iii. Selling Expenses
In balance sheet Fixed Assets are shown at Cost less
Accumulated Depreciation i.e. Written Down Value (WDV)
Recording the Depreciation
Journal Entry
Debit Depreciation Expense Account
Credit Accumulated Depreciation Account
Presentation
Profit and Loss Account
Revenue
- Cost of Sales
- Admin, Selling and Financial Expenses
Balance Sheet
Fixed Assets
- Accumulated Depreciation
Methods of Calculating Depreciation
Straight Line Method
Reducing Balance or Written Down Value Method
Residual Value
It is the estimated value of the asset at the end of its useful
life.
Straight Line Method of Calculating Depreciation

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

Disposal of Asset

Cost of Asset = 100,000
Life Of the Asset = 5 Years
Depreciation Method = Straight Line
Residual Value = Rs. 10,000
Sale Price After Five Years = Rs. 15,000

Did we lose Rs. 85,000 (100,000 15,000) on the disposal of
this asset?
Method of Depreciation = Straight line

Total Depreciation in Five Years = 18,000 x 5
= 90,000

Book Value After Five Years = 100,000 - 90,000
= 10,000

Profit on Disposal = 15,000 10,000
= 5,000
Recording of Disposal
Recording of Disposal
Debit Fixed Asset Disposal A/c 100,000
Credit Fixed Asset Cost A/c 100,000
(with the cost of asset)

Debit Accumulated Dep. A/c 90,000
Credit Fixed Asset Disposal A/c 90,000
(with the depreciation accumulated to date)

Debit Cash / Bank / Receivable A/c 15,000
Credit Fixed Asset Disposal A/c 15,000
(with the price at which asset is sold)
Disposal of Asset Account
Fixed Asset Disposal Account
DEBIT CREDIT
Cost Account 100,000 Acc. Dep. Account 90,000
Cash / Bank 15,000
100,000
105,000
P & L Account
5,000
105,000
105,000
Total Total
Revaluation of Assets
Revaluing means Valuing Again. This means that the
Revaluation of something is required when we think that the
value shown in Balance Sheet is does not represent its real
worth.
The theory behind revaluation is as follows:
We have said that the balance sheet shows the financial
position of an entity at a specific date.
And we record fixed assets at their purchase cost in the
books of accounts.
Now the fixed assets are assets that have physical
existence and are used by the business for a long time.
Therefore unlike Debtors, Creditors, Cash, Bank and
other balance sheet items they may have a value
different than the one appearing in the accounts. It may
be less or more than the WDV / book value.
The Need For Revaluation
Take the example of Land. A company may use a piece of
land on which its factory or office is built for many years.
This period can extend to ten, fifteen, twenty years or even
more.
You know that the value of land is almost always on the
rise. So at some time the company may think that the land
is not being shown at its real worth in the accounts.
Same can be the case with other assets like Building,
Machinery etc.
Therefore the need of revaluation arises to show the fixed
assets of the company at their fair value.
FAIR VALUE is the value that an asset would fetch in a
transaction between two knowledgeable parties in an arms
length deal (market value where seller and buyer both have
a fair idea of market).
Rules For Revaluation
But when we stop using one policy that is stating Fixed
Assets at their original cost the way we have been doing
before then we have to follow some rules.
The major rules and regulations governing revaluation are
as follows:
Once the fixed assets are stated at revalued amount then
the exercise of revaluation has to carried out at regular
intervals. The frequency of revaluation depends intervals
depend on the movement in the fair market values.

This means that you cannot use this to get results of your
choice i.e. getting the assets revalued when the market
values are high but not doing it again when the market
values drop or vice versa. Again once you state the
balances at revalued amount the revaluation has to be
carried out at regular intervals.
Rules For Revaluation
The work of revaluation has to be carried out by an
expert authorized in this respect by regulatory authorities.
You can not just say it yourself that as of today we have
revalued our assets to such and such value.
If we decide to revalue an asset say a piece of land or
machinery then we have to revalue the whole class to
which that asset belongs i.e. Land and Plant and
Machinery respectively. It is not possible to revalue
selected assets within one classification. For example if
an organization owns four different pieces of land and it
decides to revalue Land, then all the land will have to be
revalued. Again this rule has been framed to prevent
malpractice of obtaining desired results by selected
revaluation.
Accounting for Revaluation
Lets assume that a whole class of assets say Plant and
Machinery or Land and Building was purchased in Year 1
for Rs. 200,000. Depreciation is charged at 20% on straight
line.
After the end of Year 3, Cost of the asset is still Rs. 200,000
and its accumulated depreciation is Rs. 120,000 (40,000 x
3). This means that book value or WDV of the asset is Rs.
80,000.
At the time of revaluation it is discovered that the Fair Value
of the asset is Rs. 140,000.
Accounting for Revaluation
Step 1 The accumulated depreciation is charged off against
the cost of the asset
Debit Accumulated Dep. Account 120,000
Credit Plant and Machinery 120,000
This will reduce cost to Rs. 80,000
Step 2 Cost of the asset is increased to Rs. 140,000. The
credit is given to a new account Revaluation Reserve
Account. This account will have a credit balance and will be
shown as a liability in balance sheet.
Debit Plant and Machinery Account 60,000
Credit Revaluation Reserve Account 60,000
This will increase the cost to the desired level of Rs.
140,000 (80 + 60)
Treatment of Revaluation Reserve
One might think what is the purpose of the whole exercise.
At on side we have increased an asset and on the other a
liability has increased.
It would have made more sense if the Credit was given to
P&L Account. Then we would have said that the business
gained from Appreciation in the value of a fixed asset.
Ultimately this reserve also becomes part of the P&L but we
will cover that at a later stage.
Treatment of Revaluation Loss
It is not necessary that revaluation produces a gain. It can
also result in a loss.
In this case the calculation is made the same way but
instead of Revaluation Reserves Account a Loss on
Revaluation of Fixed Assets account is used which is
charged to P&L straightaway.