This document discusses accounting for fixed assets. It defines fixed assets and explains capitalization and depreciation. It describes various depreciation methods including straight-line, declining balance, and sum of years methods. It also covers asset disposal and how gains or losses are calculated.

1. ACCOUNTING FOR
FIXED ASSETS
Author: Dr. Meera
Sharma
© 2023 Dr. Meera Sharma

2. CONTENTS
• FIXED ASSETS
• CAPITALIZATION
• DEPRECIATION
• DEPRECIATION METHODS
• ASSET DISPOSAL
© 2023 Dr. Meera Sharma

3. FIXED ASSETS
• FIXED ASSETS ARE ASSETS HELD
FOR PRODUCING OR PROVIDING
GOODS OR SERVICES AND NOT
HELD FOR SALE IN THE NORMAL
COURSE OF BUSINESS
© 2023 Dr. Meera Sharma

4. FIXED ASSETS
• FIXED ASSETS ARE LONG LIVED NON MONETARY
ASSETS
 THEY COULD BE TANGIBLE LIKE LAND,
BUILDING, EQUIPMENT, LAPTOPS, COMPUTERS
FURNITURE, VEHICLES
 OR INTANGIBLE LIKE SOFTWARE USED IN
LAPTOPS, OR DESIGNS OF PLANT, BUILDING,
EQUIPMENT
© 2023 Dr. Meera Sharma

5. CAPITALIZATION
• EXPENDITURE ON FIXED ASSETS IS
CAPITALIZED
• CAPITALIZATION IS THE PROCESS
OF TREATING AN EXPENDITURE AS
AN ASSET TILL ITS BENEFITS HAVE
BEEN FULLY REALIZED
© 2023 Dr. Meera Sharma

6. CAPITALIZATION
• BETTERMENTS AND REPLACEMENTS
OF PLANT AND EQUIPMENT ARE
CAPITALIZED, REPAIRS AND
MAINTENANCE ARE NOT
• BETTERMENTS EXTEND THE USEFUL
LIFE OF AN ASSET
© 2023 Dr. Meera Sharma

7. CAPITALIZATION
• PURCHASE PRICE AND ALL
COSTS INCURRED IN BRINGING
THE ASSET TO ITS WORKING
CONDITION ARE INCLUDED IN
ITS COST
© 2023 Dr. Meera Sharma

8. DEPRECIATION
• PROCESS OF ALLOCATING THE
DEPRECIABLE AMOUNT OF ASSETS
OVER THEIR USEFUL LIFE
• DEPRECIABLE AMOUNT OF ASSETS
ARE THEIR COST LESS THEIR
RESIDUAL VALUE
© 2023 Dr. Meera Sharma

9. DEPRECIATION
• THE DEPRECIATION CHARGE FOR
EACH PERIOD IS RECOGNIZED AS
EXPENSE IN THE INCOME
STATEMENT
• THE CARRYING AMOUNT OF THE
ASSET IN THE BALANCE SHEET IS
THE COST OF THE ASSET LESS
ACCUMULATED DEPRECIATION
© 2023 Dr. Meera Sharma

10. DEPRECIATION
• DEPRECIATION
–IS A METHOD OF COST
ALLOCATION
–DOES NOT INVOLVE ANY CASH
OUTFLOW
© 2023 Dr. Meera Sharma

11. DEPRECIATION METHODS
• THE DEPRECIATION METHOD USED
SHOULD REFLECT THE PATTERN IN
WHICH THE ASSET’S FUTURE ECONOMIC
BENEFITS ARE EXPECTED TO BE
CONSUMED BY THE ENTITY
© 2023 Dr. Meera Sharma

12. DEPRECIATION METHODS
• LEVEL ALLOCATION
– STRAIGHT LINE METHOD
• ACCELERATED ALLOCATION
– DECLINING BALANCE METHOD
– SUM OF YEARS METHOD
• PRODUCTION DEPENDANT ALLOCATION
LARGER
EXPENSE
IN INITIAL
YEARS
© 2023 Dr. Meera Sharma

13. DEPRECIATION METHODS
• LEVEL ALLOCATION
 STRAIGHT LINE METHOD
• EQUAL DEPRECIATION CHARGED EACH
YEAR
• CALCULATED AS A FIXED PROPORTION OF
DEPRECIABLE AMOUNT
• FIXED PROPORTION DEPENDS ON THE
USEFUL LIFE OF ASSET
© 2023 Dr. Meera Sharma

14. DEPRECIATION METHODS
• LEVEL ALLOCATION
 STRAIGHT LINE METHOD
 FOR EXAMPLE IF THE USEFUL LIFE IS 5
YEARS, ONE FIFTH OF THE
DEPRECIABLE AMOUNT IS THE
DEPRECIATION CHARGED EACH YEAR
© 2023 Dr. Meera Sharma

15. DEPRECIATION METHODS
• ACCELERATED ALLOCATION
– DECLINING BALANCE METHOD
• FIXED RATE APPLIED TO THE CARRYING
AMOUNT LESS RESIDUAL VALUE OF ASSET
AT BEGINNING OF THE YEAR
© 2023 Dr. Meera Sharma

16. DEPRECIATION METHODS
• DIFFERENCE BETWEEN THE
STRAIGHT LINE AND DECLINING
BALANCE METHOD
• IN STRAIGHT LINE A FIXED CHARGE IS
APPLIED TO THE DEPRECIABLE AMOUNT
• IN DECLINING BALANCE A FIXED CHARGE
IS APPLIED TO THE CARRYING AMOUNT
LESS RESIDUAL VALUE EACH YEAR
© 2023 Dr. Meera Sharma

17. DEPRECIATION METHODS
• ACCELERATED ALLOCATION
– SUM OF YEARS METHOD
• DEPRECIATION CHARGE IS A DECLINING
FRACTION OF DEPRECIABLE AMOUNT
• FRACTION HAS SUM OF DIGITS OF USEFUL
LIFE AS DENOMINATOR AND DECLINING
USEFUL LIFE AS NUMERATOR
• FOR EXAMPLE THE FRACTIONS FOR A
ASSET WITH USEFUL LIFE OF 5 YEARS WILL
BE 5/15 IN THE FIRST YEAR, 4/15 IN THE
SECOND AND SO ON WHERE SUM OF
DIGITS IS 15 (5+4+3+2+1)
© 2023 Dr. Meera Sharma

18. DEPRECIATION METHODS
• DIFFERENCE BETWEEN DECLINING
BALANCE AND YEAR DIGIT METHODS
– DECLINING BALANCE APPLIES A FIXED
CHARGE TO A DECLINING AMOUNT
– SUM OF YEARS APPLIES A DECLINING CHARGE
TO A FIXED AMOUNT
© 2023 Dr. Meera Sharma

19. DEPRECIATION METHODS
• PRODUCTION BASED ALLOCATION
• DEPRECIATION CHARGE = (NO. OF UNITS
PRODUCED IN YEAR /TOTAL PRODUCTION
EXPECTED IN USEFUL LIFE) * DEPRECIABLE
AMOUNT
© 2023 Dr. Meera Sharma

20. ASSET DISPOSAL
• ON DISPOSAL OF FIXED ASSET
 LOSS OR GAIN IS THE DIFFERENCE
BETWEEN NET DISPOSAL PROCEEDS
OVER CARRYING AMOUNT
 LOSS OR GAIN IS RECOGNIZED IN
INCOME STATEMENT
© 2023 Dr. Meera Sharma