Fixed Assets and Depreciation

Fixed Assets and Depreciation

In terms of realization of cash, fixed assets have a longer liquidity time period. For example, if the business has purchased land and buildings, it will take a longer time to be realized in cash. In contrast, the current assets of the company – including money receivable, inventory, etc. – have a shorter time frame to be realized in cash.

In order to reduce the burden on the business accounting bodies all over the world, the depreciation tool is used to determine the actual value of the asset and use it as a sinking fund to replace the asset in the future.

The whole process of depreciation calculation occurs at the end of the year when accounts are prepared. The calculation is a non-cash expense which is estimated or forecasted and is shown in both the profit and loss statement and the balance sheet.

The question of why fixed assets should be depreciated is a common one asked by many. The main reason for calculating depreciation is to calculate the recovery of cost that is incurred on fixed assets over their useful life. This ensures the owner’s capital is intact. By following the process, future provisions can be made for replacement costs when the present asset is retired from the business.

The true value of an asset can be ascertained if depreciation is taken into account. If depreciation is not calculated, the asset value shown in the accounting books would be higher than the actual or true value.

Moreover, depreciation is often added to the cost of production so as to find out the actual cost of production. This is because machinery and equipment used to produce the product often incurs some sort of wear and tear of the asset. This must be calculated and added to the cost of producing the product.

Thirdly, depreciation must be calculated to find out the correct profit of the year and to find out the actual position of the business through the balance sheet. Unless the depreciation value is calculated and considered like other expenses, the true profit or loss of the business cannot be ascertained.

Lastly, as per Company Act statutes, a company cannot declare dividends until it has calculated depreciation and charged it to the books.

Example: You may recall that Jim, the owner of Joint Ventures, was less than thrilled with the need to lease a plane from Hurt’s Plane Rental. So he decided to buy a used plane for $75,000.How should the payment be recorded?

Since the expenditure is very large and the plane should be useful for several years, it is not reasonable to treat the acquisition as an expense. Clearly, the plane is a fixed asset. Because the plane will help generate revenue over several periods, it is not a current period expense. This is the entry for the acquisition:

One asset account, Equipment, has increased while a second asset account, Cash, has decreased.

Example: Assume that Joint Venture’s plane will last twenty years. There is no reason to assume that this plane will physically deteriorate more rapidly in the beginning or end of its useful life, so the straight-line method is used. Dividing $75,000 by 20 years gives an annual depreciation amount $3,750 per year. The entry for recording the annual depreciation is:

Accumulated depreciation is known as a contra asset account. It is found on the left (asset) side of the balance sheet, but unlike other assets, it normally has a credit balance. The idea is to allow an asset’s acquisition price to be reflected at its original cost, offset by the amount of depreciation taken against it. The fixed asset section of Joint Ventures’ balance sheet as of 12/31/04 would look like this:

Because businesses usually have several fixed assets purchased at different times, with different useful lives and different depreciation methods, it is necessary to keep a separate schedule of these assets called a fixed asset schedule. An example of a portion of a fixed asset schedule is:

Depreciation methods for fixed assets

In most circumstances you can choose between the diminishing value and straight line methods of calculating depreciation.

You do not have to use the same depreciation method for all your assets, but you must use whatever method you choose for an asset for the full year. You can change methods for any asset from year to year.

You can elect not to depreciate an asset.

The depreciation rates for various assets are set by Inland Revenue, and are based on the cost and useful life of the asset being depreciated. The general depreciation rates both diminishing value and straight lines apply as follows:

1993-2005 asset rates: Use for assets acquired on or after 1 April 1993 and before 1 April 2005, and buildings acquired on or after 1 April 1993 and before 19 May 2005, and

2006 and future year’s asset rates: Use for assets other than buildings acquired on or after 1 April 2005 and buildings acquired on or after 19 May 2005.

1. Diminishing value depreciation

The amount of depreciation is worked out on the adjusted tax value of the asset. This value is the original cost less any depreciation already claimed in previous years. If you are registered for GST the original cost price should not include GST you have already claimed in your GST return.

Example

A car purchased in May 2005 has a depreciation rate of 30% diminishing value.

Note: For secondhand and imported used cars the 20% loading does not apply.

The cost (excluding GST) was $30,000.

 

2. Straight line depreciation

Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. If you are registered for GST, the cost excludes any

GST you have already claimed in your GST return.

Example

If the car in the example above is depreciated using the straight line method, the rate is 21%.

The GST-exclusive cost is $30,000, so the depreciation to claim each year is $6,300

$30,000 x 21% = $6,300

3. Pooling assets

• You may use a pool system to depreciate low-value assets collectively rather than individually and depreciate them as though they were a single asset.

• You must use diminishing value depreciation rates for pooled assets.

• You can pool assets that: individually cost $2,000 or less, or have been depreciated so the adjusted tax value is $2,000 or less, and are used 100% for business, or are liable for fringe benefit tax if the business use is less than 100%.

• Each pool is depreciated using the diminishing value method, at the lowest rate applying to any asset in the pool.
Video

http://www.youtube.com/watch?v=EGfTmoXGyVM



Written by
Natasha Méndez




Sources consulted
Author: John Day
Date: november 24, 2011
http://www.investorwords.com/1416/depreciation.html




 

Five essential funtions of Accounting

Recording:

It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner.

Classifying:

Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as "Ledger".

Summarizing:

This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements:

• Trial Balance

• Income statement

• Balance sheet.

Analysis and Interprets:

The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of policies for executing such plans.

Communicate:

The accounting information after being meaningfully analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statements etc.

Sources consulted

http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)

Written by Edwin Fernández



T count and double Entry Accounting

The simplest account structure is shaped like the letter T. The account title and account number appear above the T. Debits (abbreviated Dr.) always go on the left side of the T, and credits (abbreviated Cr.) always go on the right.



Accountants’ record increases in asset, expense, and owner's drawing accounts on the debit side, and they record increases in liability, revenue, and owner's capital accounts on the credit side. An account's assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner's drawing accounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances. To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account's balance. You may find the following chart helpful as a reference.

Occasionally, an account does not have a normal balance. For example, a company's checking account (an asset) has a credit balance if the account is overdrawn.

The way people often use the words debit and credit in everyday speech is not how accountants use these words. For example, the word credit generally has positive associations when used conversationally: in school you receive credit for completing a course, a great hockey player may be a credit to his or her team, and a hopeless romantic may at least deserve credit for trying. Someone who is familiar with these uses for credit but who is new to accounting may not immediately associate credits with decreases to asset, expense, and owner's drawing accounts. If a business owner loses $5,000 of the company's cash while gambling, the cash account, which is an asset, must be credited for $5,000. (The accountant who records this entry may also deserve credit for realizing that other job offers merit consideration.) For accounting purposes, think of debit and credit simply in terms of the left-hand and right-hand side of a T account.

http://www.youtube.com/watch?v=6xR2ijuDiHI

 

The key factor of a double entry system is the presence of a ‘cash book’ account. This account contains the entries made when assets (e.g. money) are taken into or released from the accounting system. As such the total value of this account always matches the total value of the assets in the system. Using accountant’s ‘T charts’ to represent this we use the following example that uses two accounts only. The ‘cash book’ and an account in the name of ‘Smith’. (a) £300 is entered into this system to be allocated to the Smith account. The £300 is credited to the Smith account (credits are on the right, debits on the left). To match this debit of £300 is allocated to the Cash Book.

b) If £50 is taken out of the system from the Smith account, £50 is debited from the Smith account and credited to the Cash Book.

(c) If another account is added in the name of Pattel and £100 is transferred from Smith to Pattel then £100 is debited from Smith and £100 credited to Pattel.

(d) To complete the picture £60 is taken out of the system from the Pattel account with a debt from Pattel and a credit to the Cash book.

At the end of this the Smith account balance is £150, the Pattel account is £40 and the Cash Book is £-190, the negative sum of the other accounts. On this simple basis very complex asset tracking systems can be built.

The above example is shown below as entries in this data model (the column list is kept as simple as possible for clarity).



 

The balance of the POSTING Amount column always being zero after every complete JOURNAL transaction (and the software must not allow an incomplete one). From the above the total in the Cash Book adds up to –190 which is the negative sum of the 150 belonging to Smith and the 40 belonging to Pattel.

To expand this system into a multi-currency system a new asset type is added and used. If Mr Smith wished to change £20 into dollars at a rate of £1 to $1.5 the transaction is made though the Cash Book as follows (the required POSTING entries):

http://www.youtube.com/watch?v=Aw-rf76ofx0

ACCOUNTING PERIODS

Our accounting model so far is perfectly sound but could creak under high volumes as we can never delete anything. Most accounting requirements include the concept of an accounting period, maybe monthly, three monthly or yearly, for example. Whilst there is no need to constrain the logical requirement for an accounting period by tying it too closely to the physical model it provides a useful indication as to where to break flow of the data. The year end is often a convenient point, either the calendar year end or the financial year end. By adding a period indicator column to the POSTING table (and also to its primary key) the data can be split into discreet time chunks that can be validated independently. If in the above example the next set of entries fell into the next accounting period the balances outstanding are brought forward as summary entries in the next period first (leaving out the currency exchange example for simplicity).

Written by
Natasha Méndez


Sources consulted
Author: Jhon Wiley
Date: may 5, 2011

http://www.accounting-basics-for-students.com/T-accounts.html



Journal Entries

After a transaction occurs and source document is generated, the transaction is analyzed and entries are made in the general journal. A journal is a chronological listing of the firm´s transaction, including the amounts, accounts that are affected, and in which direction the accounts are affected.

A journal entry takes the following format

In addiction to this information, a journal entry may include a short notation that describes the transaction. There also may be a column for a reference number so that the transaction can be tracked through the accounting system.

The above format shows the journal entry for a single transaction. Additional transaction would be recorded in the same format directly below the first one, resulting in a time-ordered record. The journal format provides the benefits that of all the transaction are listed in chronological order, and all parts (debits and credits) of each transaction are listed together.

Because the journal is where the information from the source document first enters the accounting system, it is known as the book of original entry.

Compound Journal Entries

The format shown above has a single entry for the debit and a single entry for the credit, this type of entry is know as a simple journal entry. Sometimes, more than two accounts are affected by a transaction so more than two lines are required. Such a journal entry is know as a compound journal entry and takes the following format:

For example, if an expense is incurred in which part of the expense is paid with cash and the remainder placed in accounts payable, then two lines would be used for the credit – one for the cash portion and wants for the account payable portion. The total for the two credits must be equal to the debit amount.

As many accounts as are necessary can be used in this manner, and multiple accounts also can be used for the debit side if needed.

Special Journals

The general journal is the main journal for a wide range of transactions. Of these, a business usually finds itself performing some types much more frequently than others.

By grouping specific types of transaction into their own special journal, the efficiency and organization of the accounting system can be improved.

Some commonly – used special journals:

• Sales Journal

• Purchases Journal

• Cash Receipt Journal

• Cash Disbursements Journal

While a special journal may be organized differently from the general journal, it still provides the core transaction information such a date, debits and credits, and the relevant accounts.

Sources consulted

http://www.quickmba.com/accounting/fin/journal-entries/

Written by Edwin Fernández

Financial Statement

Business report information in the form of financial statements issued on a periodic basis. GAAP requires the following four financial statements:

• Balance Sheet: statement of financial position at a given point in time

• Income Statement: revenues minus expenses for a given time period ending at a specified date.
• Statement of Owner´s Equity: also know as Statement of Retained Earnings or Equity Statement

• Statement of Cash Flows: Summarizes sources and uses of cash, indicates whether enougt cash is available to carry routine operations

Balance Sheet The balance sheeet is based on the following fundamental accounting model:

Assets = Labilities + Equity

Assets can be classed as either assets or fixed assets, Current assets are assets that quickly ans easily can be converted into cahs, cometimes at a discount to the purchase price. Current assets include cash, accounts receivable, marketable securities, notes receivable, inventory and prepaid assets such a prepaid insurance. Fixed assets include land, buildings, and equipment. Such assets are recorded at historical cost, which often is much lower than the market value.

Liabilities represent the portion of a firm´s assets that are owed to creditors. Liabilities can be classed as short-term liabilities (current)and long-term (not-current) liabilities. Current liabilities include accounts payable, notes payable, interest payable, and wages payable and taxes payable. Long-term liabilities include mortgages payable and bonds payable. The portion of a mortgages long-term bond that is due within the next 12 months is classed as a current liability, ans usually is referred to as the current portion of long-term debt. The creditors of a business are the primary claimants, getting paids before the owners should be business cease to exist.

Equity is referred to as owner´s equity in a sole propietorship or a partnership,asd stockholders´ equity or shareholders´equity in a corporation. The balance sheet reports the resourses of the entity

Income Statement:

Present the result of the entity´s operations during a period of time, the equation to decribe income is:

Net Income= Revenue – Expenses

Revenue are the inflows from the delivery or manufactureof a product or from a servic. Expenses are inflows incurred to produce revenues.

Operations incomecan be separated from oters forms of income, can described by:

Net Income:Revenue – Expenses + Gains – Losses

 Statement of Retained Earnings The Equity Statement explaing the changes in retained earnings this appear on the balance sheet are influenced by incomes and dividens. This Statement use information from the income statementand provide information to balance sheet.

 

 The next equation describe this:
 

 Ending Equity = Beginning Equity + Investments – Withdrawals + Income

 
The dividends paid are substitute by withdrawals; the equity is calculated of this way:
 
 

+ Premium on Common Stock (issue minus par value)

+ Preferred Stock (recorded at par value)

+ Premium on preferred Stock (issue minus par value)

+ Retained Earnings = Stockholder´s Equity Example:

 

 
 

Cash Flow Statement This Statement is useful to companies to evaluating the ability to pay it bills, The cash flow provides the following information:

• Sources of cash

• Uses of cash

• Change in cash balance

 

The cash flow statement represents an analysis of all the transactions of the business, reporting where the firm obtained its cash and what it did with it. The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and for the income statement for the period.

Written by
Natasha Méndez





Sources consulted
Author: David Harper

Date: october 17, 2011

http://www.quickmba.com/accounting/fin/statements/

Accounting books

Accounting books

Procedures manual: works to provide information specified in because it uses certain account in a transaction. Describes the nature of the account.

To work in this manual there are different books:

Book inventory:It is used in the opening or closing of the fiscal year. You can determine the balance between rights and obligations of the organization. Causes the departure of stability in the book of newspaper, also can be defined as the summary of the inventory in a company.

In the follow image an example to Book inventory:

Daily book:

Records and reflects the accounting events chronologically. The amounts of accounts that had movements during the period, here are the seats of all accounting items and move to the General Ledger.

Example:

Ledger:

The control of movements of each accounting balance sheet account carried effect of having information at any time balances of each one of the accounts.

Balance:

Check the balance between assets and liabilities accounts, so you get a balance of verification. The information for this balance is searchable ledger and it is the basis for preparation of financial statements, can not be side mention that the financial statements are extremely important for decision making in a company.

Example

 

For us it is essential to keep a strict control with the accounting book, for they are a reflection of every transaction that takes in the company, giving accurate information, when needed, and to be a reflection of the accounts of each company indicates the status thereof.

Written by
Angie Rivera








Sources consulted
http://businesscasestudies.co.uk/business-theory/finance/accounting-functions.html
Fonseca Miranda Zaida, Accountant

Commercial documents

Commercial documents

Accounting documents are written receipts must possess physical persons or legal to have evidence of transactions, it is necessary to carry a strict order with the accounting documents because they help us to maintain control of all actions. Inside the group of commercial documents can mention:

 a) Check: To make a check turns an order in writing, in which the person or department you need to make a payment, make a purchase or an expense requested the issue, this must be signed by request. The check consists of original value which is what removes the beneficiary (the amount indicated on the check), plus a voucher for accounting, this receipt is kept in the file. If a check is cancelled, must attach a voucher, also suggests that it becomes an annotation where explain because I cancel and the number with which it replaced. In the following address we know as fill out a check and for which it is used:

Video

http://video.about.com/banking/Learn-the-Parts-of-a-Check.htm

Cheks

Types of checks

Checks with two signatures: as its name indicates, the check must bear two signatures, this is accomplished a control between both signatories and thus errors in payments can be discovered easily, also avoids one of the guardians of the company can have if only of all funds deposited in banks.

Example:

 

 Check bearer: are those that the indicators being written "Bearer” and are characterized because as its name indicated because cannot change it the person who carries.

Example:

b) Receipt: The receipt is used as a record of having received money, to cancel a debt or as a subscription to the same. It is awarded to the person receiving the money. If there was a claim by the company or person that gives, this receipt serves as a backup.

Example:

 c) Invoice: It is the document that the seller delivered to the person physical or juridical; she details will detail the product or service, price, tax, and quantities. They can go in this document detailed the conditions of the sale and warranties for services or products. It is important that a copy of the invoice is handled, the original is delivered to the client, and the copy should be reserved in the company sells. The sale to the company that delivers and a commitment to pay for the buyer is sealed before the law with this document.

An example to a invoice in the follow image:

d) Credit Note: It is the document in which the merchant sends your customer to communicate a certain amount, the accreditation in your account for the reason expressed in the same. Some cases in which it is used: breaks of goods sold, sales prices, refunds or discounts, or correct errors by excess of billing.

 The following image shows the data which must be a credit note:

 e) Debit Note: Contrary to this credit note serves to notify an entity that debited of your account. Example: Both the credit note as debit note, handled in situations where there is a difference between purchases, sales, claims of merchandise and discounts.

Example:

f) Promissory note and Bill Exchange: both are written and legal documents where the persons sign undertakes to pay the amount specified in such specific document at a time. The difference is that the bill of exchange is granted when the debt is short-term (less than one year), while the promissory note is granted when the debt is long term (greater than one year).

Examples:

 

Each accounting document has a purpose and function in the company, we must consider the preserve as indicated by our Costa Rican law (under 5 years old) that in order to have a backup for future claims or inconvenience. Our recomentadación is to maintain strict order in the accumulation of them to have information at hand.

Writen by
Angie Rivera


Sources consulted http://www.gestiopolis.com/recursos/experto/catsexp/pagans/fin/46/docscomerciales.htm
Author: Gerardo Guajardo
Second Edition

Conclusion

In our opinion all the articles written on this blog, are of great importance to provide basic knowledge to those who do not possess, likewise, were written for agreeing to complete each step of the here in mentioned, the natural or legal person, manage to obtain a solid foundation for your accounting is clear, efficient and prosperous. The authors of this blog people working in the accounting field, make sure to meet and discuss each step as indicated, to have and raise awareness of the issue here clearly exposed.

Our desire and purpose is that the above information will help them know and understand what it is and why it is important the accounts at the time that they can apply the knowledge in the daily life and to manage of a better way the economy.

Classmates commets

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Reflections 

Edwin Fernández
 

I feel like I grow up a lot since I was learning the English. All the activities were so useful; like the class discussions that were too important to my life, which is because I am not very good when I talk in public but, speak in public and in English has been too hard to me. But like my father say what doesn’t kill you make you stronger; now I speak more and better than in the past. Now I can say to any other person that the important thing is keep trying if you are not so good because the practice makes the master. I couldn’t say this before because; I was in this process. Learn another language is like born again because for example I didn’t know how to say anything in English, I needed to learn one thing at the time, all is put effort in this life.

Natasha Méndez

Class discussions improve our knowledge, because are different opinions from others classmates, not all of us think the same so each opinion is important, I learn to see the thinks from a different perspective, I learn new vocabulary too and clear some doubts about phrases I used to use.

Participate in class discussions is important this help me to speak in public, giving my own opinion, help my vocabulary too and practice my fluency when I speck, I could help some classmates in the pronunciation of some words because of this. 

Angie R. Ávila

Each person can go if he tries, it may be a tough road, but it is important that individuals have knowledge of database issues in order to direct our lives, as the number one enemy is ignorance.
Accounting is an important issue that we should know all basic albeit, as this gives us a comprehensive picture of our finances and how to handle them properly. Be aware of this and apply it the right way is to take the reins of life and direct it to a course to grow in the economic area and in the staff area. Possess knowledge in accounting is to see clearly and decide what will best benefit personal and family.

I think class discussions are very important because can open the mind to a new and better though, as listening to feedback from peers can take into account views not previously had. It is important to listen and consider grounds for a broader approach and a stronger argument.


"No investment is more profitable than knowledge." Benjamin Franklin