How to account for fised assets

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Querist : Anonymous

Querist : Anonymous (Querist)

14 August 2012 purchased speed fan of rs 3000/- how will be accounted in the books of accounts?

what is the normal crietria to record the fixed assets ? is it below rs 5000 can be written off straight to debiting p & l account?

when there is the replacement of wiring by new wires & it is major exp , what is the nature of it?

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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15 August 2012 Account as fixed asset and claim 100% depreciation in the same year.

Querist : Anonymous

Querist : Anonymous (Querist)

15 August 2012 how can claim as full dep simulantously claim as fixed assets?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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28 July 2024 Accounting for fixed assets involves several key steps to ensure that these assets are recorded correctly and their costs are allocated appropriately over their useful lives. Here’s a detailed explanation addressing your queries:

### **1. **Accounting for Fixed Assets**

**1.1. **Initial Recording:**
When a fixed asset is purchased, it should be recorded in the books of accounts at its purchase cost. This includes the cost of acquisition, installation, and any other expenses directly attributable to bringing the asset into its working condition.

**1.2. **Example – Speed Fan Purchase:**
If you purchase a speed fan for ₹3,000, the accounting entry would be:

- **Purchase of Speed Fan:**
```
Debit: Fixed Assets - Speed Fan (Balance Sheet) ₹3,000
Credit: Bank/Cash (Balance Sheet) ₹3,000
```

**1.3. **Criteria for Recording Fixed Assets:**
- **Capitalization Threshold:** Different organizations have varying thresholds for capitalizing assets. Common thresholds might be ₹5,000 or ₹10,000, below which expenses are directly charged to the Profit & Loss account. However, this threshold should be in line with the organization’s accounting policy and consistent with accounting standards.
- **Policy Example:** If your organization’s policy states that assets below ₹5,000 can be written off immediately, then a fixed asset costing ₹3,000 would be directly charged to the Profit & Loss account instead of being capitalized.

### **2. **Replacement of Wiring**

**2.1. **Nature of the Expense:**
- **Major Replacement:** If the replacement of wiring is substantial and improves the efficiency or extends the life of the asset, it should be capitalized as part of the fixed asset. This is because it enhances the value or extends the useful life of the existing asset.
- **Capital Expenditure:** The cost should be added to the cost of the related fixed asset. For example, if you replace old wiring with new wiring in a building, this cost should be capitalized under the building’s fixed asset account.

**2.2. **Accounting Entry:**
Assuming the cost of wiring replacement is significant:

- **Capitalization Entry:**
```
Debit: Fixed Assets - Building (or related asset) (Balance Sheet) ₹X
Credit: Bank/Cash (Balance Sheet) ₹X
```

### **3. **Depreciation and Claiming Fixed Assets**

**3.1. **Depreciation on Fixed Assets:**
- **Depreciation:** Depreciation is the allocation of the cost of a fixed asset over its useful life. It is recorded periodically and charged to the Profit & Loss account.
- **Depreciation Entry:**
```
Debit: Depreciation Expense (Profit & Loss Account) ₹Y
Credit: Accumulated Depreciation (Balance Sheet) ₹Y
```

**3.2. **Claiming Depreciation:**
- **Depreciation Claim:** You claim depreciation on the cost of the fixed asset in your tax returns as per the applicable tax laws and depreciation rates. Depreciation is not claimed simultaneously with the purchase but is spread over the asset's useful life.
- **Example:** If a speed fan is expected to last 5 years, you would claim depreciation each year as per the depreciation rate applicable to the fan.

### **4. **Summary**

- **Recording Fixed Assets:** Capitalize fixed assets at their purchase cost, including all directly attributable costs. Use the organization's capitalization threshold to decide whether to capitalize or write off small purchases immediately.
- **Replacement Costs:** Major replacements that improve or extend the asset’s life should be capitalized. Minor repairs or maintenance costs are typically expensed.
- **Depreciation:** Depreciate the asset over its useful life. Depreciation should be recorded periodically, not immediately at the time of purchase.

### **Practical Tips:**

- **Review Policies:** Regularly review and adhere to your organization’s accounting policies for capitalization and depreciation.
- **Consult Standards:** Ensure compliance with accounting standards and tax regulations applicable to your region.
- **Seek Professional Advice:** For complex scenarios, consult with a financial accountant or tax advisor to ensure accurate and compliant accounting.

By following these guidelines, you can accurately account for fixed assets and manage related expenses and depreciation in your books of accounts.