FIXED ASSETS

Introduction to Financial Accounting

FIXED ASSETS

Define Fixed Assets:

A fixed asset is a long-term property that an enterprise acquires and utilizes in the period of its
revenue and isn’t predicted that would be utilized or devoured into cash in the upcoming 1 year.
An exemplary case of a fixed asset is a manufacturer’s plant resources, for instance, its hardware
and substructures. The term ‘fix’ signifies that these assets will not be sold out in the existing
financial bookkeeping year.

What is the Significance of Fixed Assets:

An elucidated representation of an establishment’s capital sums up to the comprehending of the

financial profit and evaluation of that business concern. Information incorporating fixed assets
and depreciation is additionally used by financial experts when they are thinking about whether
an establishment is a non-profitable or profitable enterprise. While ascertaining the profitable of
a fixed asset, the plan of action for depreciation has to be contemplated.

Types of Fixed Assets:

 Tangible Assets: Tangible asset is an asset that has a physical existence. Tangible assets
incorporate both fixed assets, such as land, buildings and machinery and current assets –
inventory.
 Intangible Assets: An intangible asset is an asset which doesn’t possess a physical
existence. Brand recognition, intellectual property, goodwill and such as copyrights,
trademarks, and patents are all examples of intangible assets.

Fixed Asset Formula:

Net Fixed Assets = Total Fixed Assets – Accumulated Depreciation

Depreciation in Fixed Assets

Depreciation is the part of a fixed asset’s cost listed as an investment during the present
accounting years. In other words, a fixed asset has a valuable long life for more than one
accounting period, therefore, depreciation refers to the fraction of its value used during the
current years.
Depreciation can be measured in various ways. Simplest is the Straight-line depreciation,
separating the fixed asset’s cost by the number of accounting years it is expected to last.

Accounting for Fixed Asset

If your trading concern has fixed assets, sound accounting standards can fill in as a standard to
perfectly depict these long cargo commodities on the bookkeeping records. Specific exchanges

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that affect the capital to assimilate the purchase, devaluation, revaluation, and sale of the asset.
This business is important to the precision of your trades’ financial data and reports.
Fixed Assets Examples

Fixed assets are fixed in nature and cannot be easily convertible into cash. Below is the list of
fixed assets.
 Cash and cash equivalents
 Inventory
 Investments
 PPE (Property, Plant, and Equipment)
 Land
 Buildings
 Vehicles
 Furniture
 Patents
 Stock
 Equipment

Examples

1. An example of a company's fixed asset would be a company that produces and sells
toys. The company purchases a new office building for $5 million along with machinery
and equipment that costs a total of $500,000. The company projects using the building,
machinery, and equipment for the next five years. These assets are considered fixed
tangible assets because they have a physical form, will have a useful life of more than
one year, and will be used to generate revenue for the company.
2. Fixed assets are items that are expected to provide a benefit to the purchasing
organization for more than one reporting period . When acquired, these items are
recorded in a fixed asset account. For accounting purposes, these items are segregated
into multiple accounts, based on their characteristics. The following are examples of
fixed asset accounts:
 Buildings. Includes all facilities owned by the entity.
 Computer equipment. Includes all types of computer equipment, such as servers,
desktop computers, and laptops.
 Computer software. Usually only includes the most expensive types of software; all
others are charged to expense as incurred.
 Construction in progress. This is an accumulation account in which are recorded the
costs of construction. Once an asset (usually a building) is completed, the balance is
moved to the relevant fixed asset account.
 Furniture and fixtures. Includes tables, chairs, filing cabinets, cubicle walls, and so
forth.

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 Intangible assets. Includes all nontangible assets , such as the costs of patents, radio
licenses, and copyrights .
 Land. Includes the purchased cost of land, and may also include the cost of land
improvements (which are otherwise recorded in a separate account).
 Leasehold improvements. Includes the costs incurred to renovate leased space.
 Machinery. Typically refers to production machinery.
 Office equipment. Includes copiers and similar administrative equipment, but not
computers (for which there is a separate account).
 Vehicles. Can include company cars, trucks, and more specialized moving equipment,
such as fork lifts.

These fixed asset accounts are usually aggregated into a single line item when reporting them
in the balance sheet. This fixed assets line item is paired with an accumulated depreciation
contra account to reveal the net amount of fixed assets on the books of the reporting entity.

EXAMPLES OF FIXED ASSETS

 Machinery
 Furniture
 Land and building
 Computer and its equipment’s
 Machinery
 Vehicles etc.

CRITERIA FOR RECOGNITION OF FIXED ASSETS IN THE BOOKS OF

ACCOUNTS

1. Inflow of economic benefits associated with the assets is probable in nature;

2. Asset can be reliably measured.

INITIAL VALUATION: THE INITIAL COST OF AN ASSET

INCLUDES

The cost of the asset, incidental costs necessary to bring the asset to its workable condition,
duties, and taxes paid pertaining to the acquisition of an asset, preparation of the site, handling
and delivery cost of the asset, fees pertaining to installation, cost of dismantling the asset and site
restoration.

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EXCLUDES
Administrative costs, general overhead costs, costs not directly related to bringing the asset to its
usable condition.

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COST OF AN ASSET

WHEN THERE IS A PURCHASE OF AN ASSET

Value of the Asset is at cost considering the above list.

ASSET PURCHASED AT EQUATED MONTHLY INSTALLMENT

The overall cost of the asset should include the market rate of interest cost.

ASSET EXCHANGED FOR AN ASSET

Cost of the asset will be measured at fair value except for cases wherein it is not possible to
measure the value of either of the assets or it is not a commercially identifiable transaction. Apart
from this when it is not possible to measure the fair value of the acquired asset; then the value is
carrying the amount of the asset given up.

JOURNAL ENTRY FOR PURCHASE OF AN ASSET

Particulars Debit Credit

Fixed Asset A/C –
To Cash/Bank/Creditor A/C –

ACCOUNTING MODELS FOR MEASUREMENT OF ASSET POST ITS INITIAL

MEASUREMENT

COST MODEL BASIS

The valuation of the asset is at its cost price less accumulated depreciation and impairment cost.

REVALUATION MODEL BASIS

The valuation of the asset is the fair value less its subsequent depreciation and impairment.
Valuation of assets should be carried out regularly because there should not be much of a difference
between the carrying value of the assets and its fair value. If the cost of one asset in a group
undergoes revaluation, then it applies to the entire class of assets to which the asset belongs.

REVALUATION OF ASSETS
In case of revaluation of an asset, the differential increase in the value of an asset is classified
under the head Reserves and Surplus under the category Revaluation Reserve in the balance

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sheet. On account of the disposal of the assets, one should transfer any amount lying down in the
revaluation reserves to retained earnings.
Particulars Debit Credit
Fixed Asset A/C –
To Revaluation Reserve –

After the revaluation, if the carrying amount is more than the fair value, the differential is
charged to Revaluation Surplus account.

Particulars Debit Credit

Revaluation Reserve A/C –
To Fixed Asset A/C –

When there is an increase in the valuation of the asset, there is a transfer of the differential to
revaluation reserve. After the upward revaluation, when there is a downward revaluation, the
same is first written off against the balance in the revaluation reserve. And if there is any leftover
balance, one should charge it to the income statement.

Particulars Debit Credit

Revaluation Reserve A/C –
Impairment loss A/C –
To Fixed Asset A/C –
To Accumulated Impairment Loss A/C –

DEPRECIATION
 Treatment for Depreciation remains the same for the assets classified under the cost
model as well as under the revaluation model.
 As per IAS 16, the cost of the asset less the residual amount should be allocated in a
systematic manner over the useful life of the asset.
 As per IAS 8, one should estimate the useful life as well as the residual life of the asset at
the end of each financial year to factor any changes over the year and have a better
disclosure.
 The decision of the depreciation method should be based upon the consumption of the
economic benefits of the asset by the organization.
 During the life of the asset, one can change the method of depreciation only once. This
forms a part of the disclosure in the financial statement of the organization.(Board, 2017)
Depreciation is based upon the Straight line method of depreciation. Value of the asset is
spread over the useful life of the asset. Therefore there will be only a downward movement in

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the value of the asset. Whereas when the organization switches to the revaluation model,
there can be a movement both upwards as well as downwards.

JOURNAL ENTRY FOR DEPRECIATION

Particulars Debit Credit

Depreciation A/C –
To Accumulated depreciation A/C –

IMPAIRMENT IN THE VALUE OF ASSETS

As per IAS 36, there has to be the accounting for any type of impairment in the assets so that the
carrying value of the assets shall not be more than its recoverable amount.

DISPOSAL OF ASSETS
 When the future benefits from asset are zero, it should be removed from the balance
sheet.
 Recognize the Gain or loss on sale in the profit and loss statement.
 An organization providing assets on rent ceases to provide them, then transfer these
assets to Inventory at their then carrying values.

ENTIRE VALUE OF THE ASSET IS DEPRECIATED:

Particulars Debit Credit

Accumulated
Depreciation A/C –
To Fixed Asset A/C –

IN CASE OF LOSS ON SALE OF AN ASSET

Particulars Debit Credit

Cash A/C –
Accumulated
Depreciation A/C –
Loss on sale of Asset –

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To Fixed Asset A/C –

IN CASE OF GAIN ON SALE OF AN ASSET

Particulars Debit Credit

Cash A/C –
Accumulated
Depreciation A/C –
To Gain on sale of Asset –
To Fixed Asset A/C –

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