unit 3 Accounting of Assets

Accounting for Non-current Assets



Capital expenditure: - A Capital expenditure is a cost that is added to the acquisition cost of the assets.
Or
Capital expenditure is that type of expenditure that has been incurred for the purpose of obtaining a long-term advantage for the business.

Purchases of fixed assets (Building, furniture, Plant), acquisition cost such as transportation cost custom duty, erection charge are also treated as capital expenditure.


Revenue expenditure: - A Revenue expenditure is not treated as part of the cost of the assets but as an expense on the income statement. For example, manufacturing cost, administrative cost repair cost. An item of expenditure whose benefit expires within a year or expenditure that merely seeks to maintain in the business or keep asset in good working condition is called revenue expenditure. Such expenditure does not increase the efficiency of the firm, nor does it result in the acquisition of something permanent.


Note: Treatment of expenditure on existing manufacturing facilities depends on the benefits accrued. If the expenditure results in an increase in capacity, it is capitalized. Otherwise, it is treated as revenue expenditure.




Deferred revenue expenditure: - It is that class of revenue expenditure, which is incurred during an accounting period, but is applicable either wholly or in part to future period.


Type of operating assets

Operating assets also known as fixed or long-lived, are the major productive assets of the company. Normally operating assets are used to produce the goods or services for sales. Company has been invested their capital to the operating assets, which is a significant value of company.

Operating assets are normally presented on the balance sheet in one category for property, plant, and equipment and a second category for intangibles.

Operating assets should be presented at original acquisition cost less accumulated depreciation or amortization.

Generally we can classify on 5 types of operating assets.
Property: - Land and building, furniture, computer
Plant: - Machine, transportation equipment
Equipment: - Small, machine, tools etc.
Natural resources: - Coal, electricity oil
Intangible assets: - Goodwill, patent, right, Trademark

Acquisition cost of operating assets

Acquisition cost also known as original cost should include all of the cost that are normal and necessary to acquire the assets and prepare it for its intend use. But unrelated cost should not include in acquisition process.


Acquisition cost for Property, Plant, Equipment =

Purchase price
Add, Taxes paid at time of purchase (sales taxes)
Add, Transportation charge
Add, Installation costs.



Acquisition cost for Property, Plant, Equipment on Group purchase.

Capitalization of interest



Depreciation

Depreciation is the allocation of the cost of an asset to the periods that are expected to benefit from its use. So Depreciation is a process of allocation, not valuation. All property, plant and equipotent, except land have a limited life and declined in usefulness over time.

Therefore accountant must estimate the estimate the decline in usefulness of operating asset and allocate the acquisition cost over their useful lives. This allocation process is called depreciation.

Major Causes of depreciation are: -

1) Physical deterioration: - Wear and tear
2) Inadequacy for future needs:-It refers inability to produce enough products or provide enough services to meet current demands.
3) Obsolescence: - It refers decline in usefulness brought about by inventions and technological process.



Steps of depreciation process

1) Estimating the depreciable base/depreciable amount.
2) Estimating the useful service life.
3) Choosing an appropriative cost allocation method.

# Residual value/Salvage value/scrape value: - It is that type of value which the assets can be disposed of at the end of its useful life.

# Book value: - It is defined as its acquisition cost – total amount of accumulated depreciation

Methods of depreciation

1) Straight-line method
According to this method the depreciable amount of the asset is distributed equally over the life of asset.
Depreciation expenses = Acquisition cost – Residual value/Life


When depreciation is charged: -

Depreciation Expenses-. …(Name of the asset) a/c
To Accumulated depreciation
(………………………………)

Units –of production method
According to this method, the depreciable amount of an assets is divided by the total estimated output during its useful life to obtain the unit depreciation rate.

Annual depreciation Expenses = Depreciation per unit * units produced in current year.




Accelerated deprecation method

According to this method, depreciation is provided high amount in early yeas than in the later ones.

Double declining –balance method: -
If rate is not given
Step 1- 100%/ No. of life
Step 2 – Rate *2
Depreciation + Beginning book value * Rate

Sum of the year's digits method
Sum of digits = N* (N+1)/2
Where N= Life of the asset
Depreciation = (Acquisition cost- Residual value)* Rate




Intangible Assets
Intangible assets have no physical features, and it is not non-current asset. It is appear in separate long-Term assets section of the balance sheet, entitled" Intangible assets".
Generally Intangible assets are created form government authority or by legal contract such as, patents copyright, Trademark, and another form Management know-how, such as goodwill.

Some important Intangible Assets


Acquisition cost of intangible asset Page no. 379





Amortization of intangible assets
Intangible assets should be amortized over its legal life or useful, whichever is shorter.



When intangible asset are amortized:-
Name of the intangible asset expenses a/c Dr.
To Accumulated amortization exp. A/c
(………………………………………………)
When intangible assets are worth less before its life
Loss on –Name of intangible asset a/c Dr.
Accumulated amortization - Name of intangible asset Dr.
To Name of intangible asset a/c





Operating Assets: Natural Resources


Mines oil, gas and forest are natural resources classified as fixed assets in the balance sheet. Natural Resource has one major feature that is: the resource is consumed as it is used.

Acquisition cost of Natural Resources should be carried in the property, plant and equipment categories of the balance sheet as an operating asset.

Acquisition cost should include the cost of acquiring the natural resource and the costs necessary to prepare the assets for use.

When a natural resource is used or consumed, it should be treated as an expense. The process of recording the expenses is called depletion.

Acquisition cost- Residual Value
Depletion Per unit= ____________________________
Total unit in asst's life

Depletion Expenses= Depletion Per unit x unit produced or consumed in a year