Financial Accounting Lecture – 20

Recap
• What are fixed assets
• How to record purchase and disposal of fixed assets
• Classification of fixed assets
• What is depreciation
• Methods of depreciation
• Policies of Depreciation
• Capital Work In Progress
• Revaluation

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Financial Accounting Lecture – 20
Areas Covered In this Lecture
• In this Lecture We Will Cover Following Areas
 A reminder of Journal Entries For Capital Work In
Progress, and Its Presentation in Balance Sheet
 How to Treat Disposal of Asset in Case we are charging
depreciation on the Basis of Use
 Revaluation of fixed Assets

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Financial Accounting Lecture – 20
Capital Work In Progress
• The issue of capital work in progress arises when
construction of a Fixed Asset asset is not complete at the
time of preparing the balance sheet.
• Since the asset is not complete therefore it can not be
classified in fixed assets
• Also no depreciation is charged as the asset is not in use
and we had said that Depreciation is a Charge for the Use
of the asset.
• Therefore the Costs Incurred to the date of the Balance
Sheet Date on the construction of that incomplete asset are
accumulated in an account called Capital Work In Progress.
• The Journal Entries are as follows:

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Financial Accounting Lecture – 20
Capital Work In Progress Journal Entries
• At the time of Payment for the construction:
Debit Capital Work In Progress Account
Credit Cash / Bank / Payable
• At the time when the asset is completed and put in use
Debit Fixed Assets (relevant account)
Credit Capital Work in Progress Account
• Balance in the Capital Work in Progress Account therefore
becomes ZERO when the asset is completed and its use is
started.
• REMEMBER no depreciation is charged on capital work in
progress.
• Capital Work in Progress is presented after Fixed Assets
and before other long term assets in Balance Sheet.
• Its presentation in balance sheet is shown in the following
slide
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Financial Accounting Lecture – 20
Capital Work In Progress Presentation
Name of the Entity
Balance Sheet As At
Particulars Amount Rs. Amount Rs.
Assets
Fixed Assets xxx
Capital Work in Progress xxx
Other Long Term Assets xxx
Current Assets
Total xxx
Liabilities
Capital xxx
Profit xxx xxx

Long Term Liabilities xxx

Current Liabilities
Total xxx

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Financial Accounting Lecture – 20
Dep. and Disposal in Case Depreciation on the Basis of Use

• We discussed two policies for charging depreciation:

 One was to charge depreciation on the basis of use,
 And the other was to charge full depreciation on the year
of purchase and charging no depreciation in the year of
sale.
• In the second case it is easier to charge depreciation and
calculate WDV at disposal.
• But in the first case the calculations are a little bit difficult we
will therefore revise them for you.
• Just to remind you the data of the example was:

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Financial Accounting Lecture – 20
Example
• ABC Co. prepares it’s accounts on December 31, every
year.
• On Dec 31 Year 4 the machinery included:
 One machine purchased on July 1, Yr 1 for Rs. 50,000

 One machine purchased on Jan 1, Yr 2 for Rs. 75,000

 One machine purchased on April 1, Yr 3 for Rs. 100,000

 Machine 1 is disposed off on Sep 30, Yr 4.

• Depreciation is charged at 25% reducing balance method.

• Show the calculations of depreciation on machinery for the
four years, applying following policies:
 (1) Dep. is charged on the basis of use

 (2) Full Dep. on the year of purchase and no Dep. in the

year of disposal.

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Financial Accounting Lecture – 20

• The purpose of revising the same problem is mainly to explain the

working of disposal in case this policy is adopted, but we have
shown the first three years as well here for your convenience.
• Students should remember on thing that two different accounts
namely Cost and Accumulated Depreciation are used but for the
purpose of explaining the working we are deducting the
depreciation figure from cost in first year and WDV in subsequent
years.

Yr 1: One machine purchased on July 1, Yr 1 for Rs. 50,000

• Policy 1
WDV Opening Balance 0
Purchase 50,000
50,000
Dep. (50,000 x 25%) x 6/12 (6,250)
WDV Closing Balance 43,750
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Financial Accounting Lecture – 20
Yr 2: One machine purchased on Jan 1, Yr 2 for Rs. 75,000
• Policy 1
WDV Opening Balance 43,750
Purchase 75,000
118,750
Dep. (118,750 x 25%) (29,688)
WDV Closing Balance 89,062
Yr 3: One machine purchased on April 1, Yr 3 for Rs. 100,000
• Policy 1
WDV Opening Balance 89,062
Purchase 100,000
189,062
Dep. (89,062 x 25%) (22,265)
Dep. (100,000 x 25%) x 9 / 12 (18,750)
WDV Closing Balance 148,047
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Financial Accounting Lecture – 20

• If we had been been presenting this example properly then

the figures would have been as follows:
• Cost Machinery Account
Year 1 Rs. 50,000
Year 2 Rs. 75,000
Year 3 Rs. 100,000
225,000
• Accumulated Depreciation
Year 1 Rs. 6,250
Year 2 Rs. 29,688
Year 3 Rs. 22,265 + 18,750 = 41,015
76,953
• WDV = 225,000 – 76,953 = 148,047, Which is the same as
shown in the previous working.

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Financial Accounting Lecture – 20

• In the year 4 we have to dispose off the Machine 1 on Sep

30, Yr 4.
• Therefore we have to calculate it’s Accumulated
Depreciation / WDV at the time of disposal:

• WDV of machine sold this year

Cost YR 1 50,000
Dep Yr 1 (50000 x 25 %) 6/12 6,250
WDV YR1 43,750
Dep Yr 2 (43750 x25%) 10,938
WDV YR2 32,812
Dep Yr 3 (32,812 x 25%) 8,203
WDV YR3 24,609
Dep Yr 4 (24,609 x 25%) x 9 / 12 4,614
WDV YR4 19,995

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Financial Accounting Lecture – 20
Yr 4: Machine 1 is disposed off on Sep 30, Yr 4.
• Policy 1
WDV Opening Balance 148,047
Dep. Machine 1 (4,614)
Dep. Others (148,047 – 24,609) x 25% (30,860)
112,573
WDV of Asset Disposed (19,995)
WDV Closing Balance 92,578
• WDV of machine sold this year
Cost yr 1 50,000
Dep Yr 1 (50000 x 25 %) 6/12 6,250
WDV YR1 43,750
Dep Yr 2 (43750 x25%) 10,938
WDV YR2 32,812
Dep Yr 3 (32,812 x 25%) 8,203
WDV YR3 24,609
Dep Yr 4 (24,609 x 25%) x 9 / 12 4,614
WDV YR4 19,995

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Financial Accounting Lecture – 20
Revaluation of Fixed 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.
• 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.

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Financial Accounting Lecture – 20
Revaluation of Fixed Assets
• Therefore the need of revaluation arises to show the fixed
assets of the company at their fair market value and once
the fixed assets are stated at revalued amount then the
exercise of revaluation has to carried out at regular
intervals.
• 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.

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Financial Accounting Lecture – 20
Revaluation of Fixed Assets
• Loss/Gain on Revaluation:
 Loss on revaluation (fair market value < book value) is
charged to profit and loss account immediately
 Gain on revaluation (fair market value > book value) is
credited to revaluation reserve account
 Gain or surplus on revaluation of fixed assets are shown

in balance sheet separately and it is used to offset the

loss on revaluation in future.
• Revaluation is done by an expert.

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