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1. Capital vs. Revenue
Capital vs. Revenue
Why segregate ?
£ essential for accounting concept of matching
costs with revenues
£ distinction affects the ‘bottom line’ directly

2. Fixed Asset
Fixed Asset
A fixed asset
is an asset held with the intention of
being used
for the purpose of producing goods
and is not held for sale
in the normal course of business.

3. Capital Expenditure
Capital Expenditure
An expenditure incurred with a view to bringing
an asset into existence or
an advantage
or a benefit of an enduring nature
for the business, is treated as capital expenditure.

4. Revenue Expenditure
Revenue Expenditure
An expenditure incurred
for day-to-day running
of the business,
is treated as revenue expenditure.

5. Deferred Revenue Expenditure
Deferred Revenue Expenditure
An expenditure which is
not in the nature of capital expenditure
or does not bring any asset into existence,
but yet
the benefit of which to the business would
be enjoyed over, say 3-5 subsequent
years, is treated
as deferred revenue expenditure.

6. Components of Cost of Fixed Asset
Components of Cost of Fixed Asset
1. Purchase Price.
2. Import duty / any other non-refundable levy.
3. Any directly attributable cost of bringing the
asset to its working condition.
4. Borrowing cost of funds that finance the
asset.
5. Commissioning and trial expenses until
commencement of production.

7. Revaluation of Assets
Revaluation of Assets
Generally not allowed unless there are valid
and compelling reasons.
These reasons & basis for revaluation must
be disclosed.
A class of assets is revalued and not an
individual one.
Increase in value is credited to Revaluation
Reserve a/c and decrease written off to
Profit & Loss a/c

8. Machinery Spares
Machinery Spares
‘ not specific to a particular machine / asset &
can be used for generally for various items
of assets’ are treated as any other inventory
and expensed on issue.
‘ specific to a particular machine / asset & can
be used in connection with that asset only’
‘ use expected to be irregular’ are capitalized to
be written off in a systematic manner over a
period.

9. Accounting for Fixed Assets
Accounting for Fixed Assets
Asset Account Related Expense*
Land None
Property, Plant, Equipment Depreciation
Natural Resources Depletion
(like mines, oilfields )
Intangibles Amortization
* on income statement

10. Depreciation
Depreciation
Every year depreciation is calculated and
journal entry passed as under
Depreciation Expense a/c dr
To Accumulated Depreciation a/c*
* is a contra account and its matching pair is the asset
a/c.

11. Depreciation
Depreciation
Every year depreciation is calculated and
journal entry passed as under
Depreciation Expense a/c dr
To Accumulated Depreciation a/c
- is a contra account and its matching pair is the asset
a/c.
- is a non cash expense, hence added to net
income in cash flow statement.

12. Depreciation
Depreciation
In the Balance Sheet Assets are shown at
Gross Value
less Accumulated Depreciation
_________________________
Book Value

13. Depreciation
Depreciation
GAAP provide for several methods of
depreciation – we study these three
i ] Straight Line
ii ] Units of Production (UOP)
iii ] Written Down Value (WDV)

14. Depreciation
Depreciation
GAAP provide for several methods of
depreciation – we study these three
i ] Straight Line –
straight line depreciation allocates an equal
amount of expense each year during useful
life of the asset.

15. Depreciation
Depreciation
GAAP provide for several methods of
depreciation – we study these three
i ] Straight Line –
straight line depreciation allocates an equal amount
of expense each year during useful life of the asset.
cost of asset less its residual value
Calculation =
expected useful life in years

16. Depreciation
Depreciation
GAAP provide for several methods of depreciation – we
study these three
i ] Straight Line
ii ] Units of Production ( UOP )–
Method involves two step process
1. Calculate the UOP rate
= cost of asset less its residual value
divided by expected useful life in UOP

17. Depreciation
Depreciation
GAAP provide for several methods of depreciation – we
study these three
i ] Straight Line
ii ] Units of Production ( UOP )–
Method involves two step process
1. Calculate the UOP rate
2. Multiply the rate by actual UOP during the
period.

18. Depreciation
Depreciation
GAAP provide for several methods of depreciation – we
study these three
i ] Straight Line
ii ] Units of Production (UOP)
iii ] Written Down Value (WDV) –
- depreciation is calculated as %.
- following year’s depreciation at % above,
applied to the book value at beginning of the
year.

19. Depreciation
Depreciation
GAAP provide for several methods of depreciation – we
study these three
i ] Straight Line
ii ] Units of Production (UOP)
iii ] Written Down Value (WDV) –
- approved by Indian Income Tax laws.
- ignores residual value in the first year’s
depreciation.

20. Depreciation
Depreciation
i ] Straight Line
ii ] Written Down Value (WDV) –
If asset put to use in the middle of a year.
depreciation in the first year is equal to
depreciation for full year x fraction of year asset
used.
If asset commissioned in January , depreciation
will be one fourth of full year.

21. Sale of Asset
Sale of Asset
at some point , fixed assets are no longer
useful and need to be sold, exchanged or
discarded.
at this time asset account is credited &
accumulated depreciation is debited.

22. Sale of Asset
Sale of Asset
at some point , fixed assets are no longer useful
and need to be sold, exchanged or discarded.
at this time asset account is credited &
accumulated depreciation is debited.
if sale value of the discontinued asset is
more (less) than its book value, a gain (loss)
is realized.
this is credited to (written off) profit & loss
account.

23. “ Accounting for capital expenditure is
critical as segregation between capital
& revenue expense has direct impact on
the bottom line.
Depreciation is a major non-cash expense
that provides cash inflow for business.
All assets are depreciated in a consistent
manner so that there are no hits to
bottom line when asset reaches end of
its useful life”