Fixed Assets- Purchase, Depreciation and Disposal

Fixed assets refer to long-term assets bought by a business and used to create its goods and services to gain profit. They are noncurrent assets, which means they will be useful for longer than one year such as a property that owns by the company. 

Furthermore, fixed assets are to be written on the balance sheet as property, plant, and equipment (PPE). They are not easily convertible into cash and are not easily liquid. In addition, a business does not sell or consume them. The assets are instead used to generate goods and services.

IAS 16 applies to the accounting for property, plant, and equipment. The purpose of this Standard is to define the accounting treatment for property, plant, and equipment so that users of the financial statements can provide information on a company's investment in property, plant, and equipment, as well as changes in that investment. 

Purchase of Fixed Assets

Fixed assets are capitalized. The cost of a fixed asset will be recorded on the balance sheet instead of the expenses on the income statement when a company purchases fixed assets. This is because fixed assets are used in the company’s activities to generate revenue. They are initially located on the balance sheet and then slowly depreciated over their useful life. As a result, they appear on a balance sheet as property, plant, and equipment (non-current assets).

Although PPE is noncurrent assets or long-term assets, however, not all noncurrent assets are property, plant, and equipment. Intangible assets, such as patents and copyrights, are nonphysical assets. Fixed assets are classified as noncurrent assets because they add value to a firm but cannot change to cash within one year. Bonds and notes are examples of long-term investments that are also classified as noncurrent assets since they are often held on a company’s balance sheet for more than one fiscal year. PPE refers to particular fixed, tangible assets, whereas noncurrent assets relate to all of a company’s long-term assets. 

Depreciation of Fixed Assets

Fixed asset depreciation is the process of subtracting the total cost of your company’s fixed assets. Instead of completing it all at once, you deduct portions of it over time. You have more control over your budget when you depreciate fixed assets.

A fixed asset's useful life influences how many years it may be depreciated over (for example, a machine is useful for about five years). Tax depreciation is applied to various assets, and each categorization has its own useful life. If your organization uses a different method of depreciation for its financial records, you can calculate the asset's useful life depending on how long you expect to utilize the item in your business.

Depreciation allows a portion of the cost of fixed assets to be allocated to the fixed assets' revenue. This is needed under the matching principle because revenues and associated expenditures are recognized in the accounting period when the fixed assets are in use. This helps to acquire a comprehensive perspective of the revenue generation transaction.
The depreciation method should distribute an asset's depreciable value in a systematic manner across its useful life and reflect how the business expects to use the asset's future economic advantages (IAS 16.60). The most common depreciation mechanisms are as follows:

1. straight-line method
2. diminishing balance method
3. units of production method

Straight-line method

The straight-line technique is by far the most prevalent form of depreciation. The depreciation charge, as the name suggests, is dispersed equally across the useful life of an object. It is suited for most of the assets.

Diminishing balance method

The depreciation charge under the declining balance technique (also known as the lowering balance method) lowers over time since it is computed using the carrying value of the asset at the start of the current period rather than its initial cost. This strategy is used to depreciate assets that will become obsolete due to rising technological or commercial obsolescence.

Units of production method

In this method, the depreciation is based on the expected use or the output of an asset. The depreciation charge for a period reflects the share of total expected use/output consumed during that period.

In specific cases, as indicated in paragraphs IAS 38.98A-C, a depreciation/amortization method is based on revenue received by an activity that includes the use of an asset authorized for intangible assets. This is because income is affected by a variety of inputs and processes, sales activities, and changes in sales volumes and prices (IAS 16.62A).

Disposal of Fixed Assets

The removal of assets from accounting records is referred to as asset disposal. This is necessary to remove all traces of an asset from the balance sheet (known as derecognition). A gain or loss on the disposal of an asset may involve recording a gain or loss on the transaction in the reporting period in which the disposal happens.
The main concept underlying asset disposal accounting is to reverse both the fixed asset's reported cost and the corresponding amount of accumulated depreciation. A gain or loss is recorded for any residual difference between the two. The gain or loss is calculated as the net disposal proceeds less the asset's carrying value. 

No Proceeds, Fully Depreciated

When no revenues from the sale of a fixed asset are received and the asset has been fully depreciated, subtract all cumulative depreciation and credit the fixed asset.

Loss on Sale

When a fixed asset is sold, debit cash for the amount received, debit all accrued depreciation, credit the fixed asset, and credit the asset gain account.

Gain on Sale

When a fixed asset is sold, debit cash for the amount received, debit all accrued depreciation, credit the fixed asset, and credit the asset gain account.


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GETTING DOWN TO BUSINESS

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