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Fixed asset

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Fixed asset, also known as a non-current asset or as property, plant, and equipment
(PP&E), is a term used in accounting for assets and property which cannot easily be
converted into cash. This can be compared with current assets such as cash or bank
accounts, which are described as liquid assets. In most cases, only tangible assets are
referred to as fixed.

Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a
firm's consumers/end-users. As an example, a baking firm's current assets would be its
inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit
(i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets
would be the oven used to bake bread, motor vehicles used to transport deliveries, cash
registers used to handle cash payments, etc. Each aforementioned non-current asset is not
sold directly to consumers.

These are items of value which the organization has bought and will use for an extended
period of time; fixed assets normally include items such as land and buildings, motor
vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and
machinery. These often receive favorable tax treatment (depreciation allowance) over
short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets
are assets whose future economic benefit is probable to flow into the entity, whose cost
can be measured reliably.

It is pertinent to note that the cost of a fixed asset is its purchase price, including import
duties and other deductible trade discounts and rebates. In addition, cost attributable to
bringing and installing the asset in its needed location and the initial estimate of
dismantling and removing the item if they are eventually no longer needed on the
location.

The primary objective of a business entity is to make profit and increase the wealth of its
owners. In the attainment of this objective it is required that the management will
exercise due care and diligence in applying the basic accounting concept of “Matching
Concept”. Matching concept is simply matching the expenses of a period against the
revenues of the same period.

The use of assets in the generation of revenue is usually more than a year- that is long
term. It is therefore obligatory that in order to accurately determine the net income or
profit for a period depreciation is charged on the total value of asset that contributed to
the revenue for the period in consideration and charge against the same revenue of the
same period. This is essential in the prudent reporting of the net revenue for the entity in
the period.

Net book value of an asset is basically the difference between the historical cost of that asset and it associated depreciation. etc. Even in the case of service entities such as hotels. it is the best way of consciously presenting the value of assets to the owners of the business and potential investor. financial institutions. Land and buildings. The method of depreciation to be adopted is best left for the management to decide in consideration to the peculiarity of the business. . may often increase in value depending on local real-estate conditions. banks. Depreciation is usually spread over the economic useful life of an asset because it is regarded as the cost of an asset absorbed over its useful life. It is worth noting that not all fixed assets depreciate in value year-over-year. buildings. for example. and technology to attract. copyrights. Fixed Assets are assets such as land. equipment. insurers. the expense generated by the use of an asset. From the foregoing. It is the wear and tear of an asset or diminution in the historical value owing to usage. It is an expense because it is matched against the revenue generated through the use of the same asset. office equipments. patents. mobile / telephone service providers etc. Further to this. simply put. A Fixed Asset Register is that list of assets. prevailing economic condition of the assets and existing accounting guideline and principles as implied in the organizational policies. machines. so it is important for a business entity to have a list of its fixed assets. held for the purpose of production of goods or rendering of services and are not held for the purpose of sale in the ordinary course of business. and retain customers. it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relatable to record and report the value of fixed assets at its net book value. it is the cost of the asset less any salvage value over its estimated useful life. Invariably the depreciation expense is charged against the revenue generated through the use of the asset. Apart from the fact that it is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset should be carried at the net book value. trademarks. Just as it is important for a person investing on the NASDAQ to know those investments. [edit] Depreciating a Fixed Asset Depreciation is. Fixed assets constitute a major chunk of the total assets in the case of all manufacturing entities. it has become imperative to invest heavily in furnishing.[1] A Fixed Asset Register (FAR) is an accounting method used for major resources of a business.

so the methods of calculating depreciation is very important. This means owned and leased assets. it increases free cash flow while decreasing reported earnings. Choosing the fit methods of calculating depreciation. an expense recorded to allocate a tangible asset's cost over its useful life. The FAR generates accurate. straight line method 2. The FAR can also be used to aid in capital budgeting and to keep track of amount provided for Asset Retirement Obligation (ARO) in respect of each asset as required by US GAAP (FAS – 143). What Does Depreciation Mean? 1. There are several possible methods of calculating depreciation: 1. it need to be faced by the finance staff. complete. and customized reports that suits the needs of management. Because depreciation is a non-cash expense. ensuring control and preventing misappropriation of assets. reducing balance method 3. and imported assets. A FAR also allows a company to keep track of fixed assets that are not under simple. What Does Fixed Asset Mean? A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. assets under construction. It allows a company to keep track of details of each fixed asset. The charge of depreciation can impact the net profit in the income statement. And it'll refer to the expense and tax in the income statement. which allows for computation of depreciation and for tax and insurance purposes. It also keeps track of the correct value of assets. direct control of the company. In accounting. . revaluation method. companies. sum of the digits method 4. 2. etc. the result will be different. Adopting different methods of calculation.Objectives in maintaining a Fixed Asset Register (FAR) A FAR must be kept in order to be in compliance with legislation governing corporations. A decrease in the value of a particular currency relative to other currencies.

Sum of the digits method The aim of this method is to show a higher depreciation charge in the early years of the life of an asset.000 Depreciation for 2013 = ($140. 2011.a.Residual value)/Estimated useful value For example. The annual depreciation charge is to be calculated using the straight line method. Straight line depreciation] On April 1. . Company A recognizes depreciation to the nearest whole month. an estimate of its useful life to the business 3. the original (historical) cost of the asset 2.000 Reducing balance method Under this method the depreciation charge will be higher in the earlier years of the life of the asset.Straight line method It's the simplest amd most popular methods of calcuating depreciation.000 p. Depreciation charge = ($24.000.000.$4. Depreciation for 2011 = ($140. an estimate of its residual value at the end of its useful life. a company purchased a car on 1 January at a cost of $24.000. Under this method the depreciation charge is constant over the life of the asset.$20.000. 2012 and 2013 using straight line depreciation method.000 . [Example.$20.000 . Here needs a percentage to apply.000 Depreciation for 2012 = ($140.000) x 1/5 x 9/12 = $18. Annual depreciation charge = (Orginal . This equipment is estimated to have 5 year useful life.000)/4= $5. At the end of the 5th year.000) x 1/5 x 12/12 = $24.000 . the salvage value (residual value) will be $20. And we need know three pieces of information: 1. Calculate the depreciation expenses for 2011. after which he will trade it in for $4.$20.000) x 1/5 x 12/12 = $24.000 . The company estimates that its useful life is four years. Company A purchased an equipment at the cost of $140. And in the first year the percentage is applied to cost but in subsequent years it's applied to the asset's net book value (alternatively known as written down value).

000 40% $39.000 2012 $98. the salvage value (residual value) will be $20.$39.000 . Company A recognizes depreciation to the nearest whole month.000 (*1) $98.$42.000.000 40% $42.Accumulated depreciation Depreciation rate for double declining balance method = Straight line depreciation rate x 200% Depreciation rate for 150% declining balance method = Straight line depreciation rate x 150% [Example.Revaluation method When a non-current asset has been revalues. Calculate the depreciation expenses for 2011. 2012 and 2013 using double declining balance depreciation method. the charge fro depreciation should be based on the revalued amount and the remaining useful economic life of the asset.000.000) x 40% x 12/12 = $39.$42.000 .800 40% $23. Double declining balance depreciation] On April 1.520 Double Declining Balance Depreciation Method Book Value Depreciation Depreciation Book Value at Year at the Rate Expense the year-end beginning 2011 $140. This equipment is estimated to have 5 year useful life.000 . At the end of the 5th year. Company A purchased an equipment at the cost of $140. 2011.200 Depreciation for 2013 = ($140.200 (*2) $58.280 .000 x 40% x 9/12 = $42. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 200% = 20% x 2 = 40% per year Depreciation for 2011 = $140. Declining Balance Depreciation Method Double declining balance depreciation Depreciation = Book value x Depreciation rate Book value = Cost .800 2013 $58.000 Depreciation for 2012 = ($140.200) x 40% x 12/12 = $23.520 (*3) $35.

950 2013 $75.000 30% $31. the salvage value (residual value) will be $20.000 .168 x 40% x 12/12 = $8.$32.550 (*2) $75.000 x 30% x 9/12 = $31.000 (*1) $140.168 (*5) $20.280 40% $14.200 (*3) $58.000 x 40% x 9/12 = $42.168 40% $1.000. 2012 and 2013 using double declining balance depreciation method. 150% declining balance depreciation] On April 1.950 30% $22.216 30% $11. depreciation stops.500 Depreciation for 2012 = ($140.168 (At this point.165 30% $15.800 x 40% x 12/12 = $23.550) x 30% x 12/12 = $22.$31.000 .165 2014 $53.500) x 30% x 12/12 = $32.$31. This equipment is estimated to have 5 year useful life.467 --> Depreciation for 2015 is $1.500 . Calculate the depreciation expenses for 2011. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 150% = 20% x 1. --> $21. Company A recognizes depreciation to the nearest whole month.785 (*3) $53.168 .500 30% $32.520 (*4) $35.000 (*2) $98.500 (*1) $108.000 x 40% x 12/12 = $39.550 Depreciation for 2013 = ($140.112 (*5) $21.051 (*6) $20.) [Example.168 to keep book value same as salvage value.000.500 2012 $108.5 = 30% per year Depreciation for 2011 = $140.280 x 40% x 12/12 = $14.000 .168 2015 $21.112 (*4) $21. 2011. At the end of the 5th year.051 2016 $26.$20. Company A purchased an equipment at the cost of $140.051 30% $6.000 = $1.216 2015 $37.950 (*4) $37.165 (*5) $26. 2014 $35.785 150% Declining Balance Depreciation Method Book Value Depreciation Depreciation Book Value at Year at the Rate Expense the year-end beginning 2011 $140.

$20. Straight Line Depreciation Method The straight line depreciation method divides the cost by the life. depreciation stops.500 x 30% x 12/12 = $32.65 / 5 = 97.815 --> Depreciation for 2016 is $6. The expected life is 5 years.051 (At this point.165 x 30% x 12/12 = $15.53 . (*1) $140.051 x 30% x 12/12 = $7. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset. Salvage value may also be considered.051 . The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Examples of depreciation calculations for both straight line and accelerated methods are provided below.950 x 30% x 12/12 = $22.550 (*3) $75.000 = $6.950 (*5) $37.051 to keep book value same as salvage value.000 x 30% x 9/12 = $31. --> $26.165 (*6) $26.65. Calculate the annual depreciation as follows: 487.) How to Calculate Depreciation Depreciation expense is calculated utilizing either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. SL = Cost / Life Example: A desk is purchased for $487.500 (*2) $108.216 x 30% x 12/12 = $11.785 (*4) $53.

815.016.217. Example: A copy machine is purchased for $3. What if there is a salvage value? Declining Balance Depreciation Method The declining balance depreciation method uses the depreciable basis of an asset multiplied by a factor based on the life of the asset.12 3.41 3 804. an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15 To find the percentage for each year divide the year's digit by the sum. Using double declining balance or 200%.67% Year 3 3 / 15 = 20 % Year 4 2 / 15 = 13.95 1. an asset with a four year life would have 25% of the cost depreciated each year.34% Year 2 4 / 15 = 26. which is the most common.94 1.5 804.413.24 402.Each year for 5 years $97. The expected life is 4 years.217.94 * 0. For example.53 would be expensed.47 2.5 402.608. In the example above the percentage would be calculated as follows: Year 1 5 / 15 = 33.50 Depreciable Depreciation Depreciation Accumulated Year Basis Calculation Expense Depreciation 1 3.5 1.94 2 1.5 201. Using double declining balance the depreciation would be calculated as follows: factor = 2 * (1/4) = 0.33 % Year 5 1/ 15 = 6.24 2.89. The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator.77 What if there is a salvage value? Sum of the Years Digits The first step is to sum the digits or numbers starting with the life and going back to one.89 * 0.48 804.24 * 0.608.67% .48 * 0. would mean that depreciation expense in the first year would be twice that or 50%. For example. The depreciable basis of the asset is the book value of the fixed asset -. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%.608.65 4 402.608.217.cost less accumulated depreciation.89 3.

34 % 489.467.Example: A conference table is purchase for 1.67 % 391. Depreciation Depreciation Year Calculation Expense 1 1.40 2 1.467.89 * 13.89 * 33.91 .467.67 % 97.33 % 195.49 3 1. The expected life is 5 years.467. Since this is a 5 year asset the yearly factors have been calculated above.89 * 26.89 * 20 % 293.467.89 * 6.467.58 4 1.67 5 1.89.