What are Fixed Assets and Depreciation? Methods of Depreciation

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what is fixed assets

What are the fixed assets?

Fixed assets are those assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment. Some examples of fixed assets are as follows –

  • Land
  • Building
  • Vehicles
  • Machinery
  • Furniture and Fixtures
  • Office Equipment

Nature of fixed assets

  • It is long term in nature which can not be consumed but used to gain a high profit
  • It is tangible
  • The organization has injected a huge amount of capital
  • In accounting fixed assets does not necessarily mean immovable; any assets expected to last, or be in use for more than one year is considered a fixed asset.
  • On a balance sheet, these assets are shown at their book value (purchase price less depreciation).
  • It is treated as an expense of loss.

What is depreciation?

विभिन्न कारणले  सम्पतिको मूल्यमा भएको गिरावट लाई ह्रासकट्टी भनिन्छ। Depreciation is decreased in monetary value due to use, wear and tear or obsolescence.  The opposite of depreciation is appreciation which is an increase in the value of an asset over a period of time.

Depreciation is useful for estimation of property value for taxation purpose like property tax etc.

Features of depreciation

  • Apply in fixed assets only, not in current assets.
  • Charged in historical cost.
  • Main cause of depreciation are wear, tear, accident, exhaustion, obsolescence, decrease in market value, passes of time, etc.
  • Charged in Profit and Loss account and decrease the value of fixed assets in the Balance Sheet.
  • Non-cash expenditure

Importance of Depreciation

  • It helps to calculate the true profit or an organization.
  • Helps in reporting of true and fair financial position of a business.
  • It determines the replacement time of assets.

Measurement of profit, reporting of true financial position, replacement of assets and saving in tax make it necessary to charge depreciation.

Factors Affecting Depreciation

  • Cost of assets
  • Estimate scrap value
  • Legal provision
  • Charges in being obsolescence of assets
  • Expenditure made in repairs of assets

Cost of assets = Purchase price – Trade discount + Shipping cost + Import duty levied on assets.

Methods of Depreciation

  1. Fixed installment method
  2. Reducing balance method – The amount of depreciation is calculated on book value. Book value = Total value – Depreciation
Base differencesFixed installment methodReducing balance Method
BasisDepreciation is charged on the original cost of assetsDepreciation is charged on book value of assets
Yearly DepreciationThe amount of depreciation is the same in each year over the life of assetsThe amount of depreciation decreases every year
Ending valueBook value of assets generally reaches zeroBook value of asset does not reach to zero
AcceptanceThis method of depreciation is not accepted by tax purposeThis method of depreciation is accepted by tax purpose

 

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