Jasmin (student) (185 Points)
30 December 2009hi,
1. in paper 1 study material, page no: 2.53, illustration 4, linen, cutlery & plates, glass & china are taken as current assets..is it right???....since its a hotel,...i feel it shud b taken as fixed assets...
2. No where in the study material i cud see trading a/c....all trading a/c items r also posted in the p&L a/c...can we follow the same way for exam also?
pls advice...
CA Shailesh Ghase. ACA,B.com
(CA)
(114 Points)
Replied 30 December 2009
Dear jasmine
1. As it is a hotel, plates etc are usually used for a short period and then thown away
a hotel industry can treat it as current assets, expenses incurred for plates cannot be capitalised as fixed asets becoz it is not used for a longer period say one or more years so u can treat it as current assets and expensed it out, there is nothing wrong in that.
2. as u say that there is nothing like trading a/c u see, in real time only manufactring co. are supposed to prepare trading a/c all other companies can combined the trading a/c items in p& L a/c at top portion of a/c and calculate Gross profit. u can surely follow this method in exams.
Regards
CA shailesh Ghase
Jasmin
(student)
(185 Points)
Replied 30 December 2009
Thank you...but in study material Gp is not calculated at all...only NP is calculated,....and regarding mfg companies, we hav to prepare mfg a/c in addition to trading a/c & p&l a/c right??
CA Shailesh Ghase. ACA,B.com
(CA)
(114 Points)
Replied 30 December 2009
yaa ur right, but for other companies if u go by veriticle format as prescibed in Sch.VI of Companies act u will come to know that all trading a/c items like direct materials, direct exp are movd through P& L a/c , thats why there is nothing wrong in that method as i feel and i have done in many audits.
Jasmin
(student)
(185 Points)
Replied 30 December 2009
i hav 1 more doubt regarding the plates...if they are treated as current assets then y is depreciation provided for them ?
(sorry...i m doing self-study...that's y i am clearing my doubts through forum)
CA Shailesh Ghase. ACA,B.com
(CA)
(114 Points)
Replied 30 December 2009
As far as my knowldge if u treat plates as current assets ie inventory u cant charged depreciation on it
it seems to be wrong, in defination of assets it mentioned that it included current assets and u can show it a Cost or Mkt value which is low, u cant charged depreciation it
it seems to be wrong
CA Shailesh Ghase. ACA,B.com
(CA)
(114 Points)
Replied 30 December 2009
Fixed asset, also known as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.
Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a firm's consumers/end-users. As an example, a baking firm's current assets would be its inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit (,i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc. Each aforementioned non-current asset is not sold directly to consumers.
These are items of value which the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery. These often receive favorable tax treatment (depreciation allowance) over short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets are assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably.
It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location.
The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period.
The use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.
Net book value of an asset is basically the difference between the historical cost of that asset and it associated depreciation. From the foregoing, it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relatable to record and report the value of fixed assets at its net book value. Apart from the fact that it is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset should be carried at the net book value, it is the best way of consciously presenting the value of assets to the owners of the business and potential investor.
Depreciation is, simply put, the expense generated by the use of an asset. It is the wear and tear of an asset or diminution in the historical value owing to usage. Further to this; it is the cost of the asset less any salvage value over its estimated useful life. It is an expense because it is matched against the revenue generated through the use of the same asset. Depreciation is usually spread over the economic useful life of an asset because it is regarded as the cost of an asset absorbed over its useful life. Invariably the depreciation expense is charged against the revenue generated through the use of the asset. The method of depreciation to be adopted is best left for the management to decide in consideration to the peculiarity of the business, prevailing economic condition of the assets and existing accounting guideline and principles as implied in the organizational policies.
It is worth noting that not all fixed assets depreciate in value year-over-year. Land and buildings, for example, may often increase in value depending on local real-estate conditions.[1]
i hv seen that illustration , that cutlery, linen hv been treated as fixed asset acrdng to information in question. There is nothing wrong in it. Materiality principle has been followed. The only mistake which appears is showing under the head of current asset. it should not be shown as current asset as per infos. i think tats printiing error. Rest allis fine. Those FA hv been charged to P&l also in the form of dep
since info abt dep . is given it has been treated as FA. It can be treated as current asset only if the benifit to be recd from it is short term,say 1yr or so. But if u r sure that it is gng to benifit u for a longer period show as FA and provide dep every year which will signify the exp incurred to get revenue for that period as per matching concept.
By seeing the turnover of this hotel , it appears that it s a small size hotel and therefore tat hotel will like to have those cutlery for more than a year, they would not throw in a short period. Hence They have considered as FA which will benifit them for a longer run and they have provided Depreciation year on year basis as per matching concept
nithesh.v
(shimoga)
(22 Points)
Replied 30 December 2009
V@$U GUPT@
(CA)
(39 Points)
Replied 30 December 2009
i think it seems to be wrong as as per AS-10 fixed assets are intended to give long term benefits. u can't show plates as current assets as it is not an inventory and then it is not possible to charge depreciation. I think it is printing error in study material. It must be shown as fixed asset as per AS-10. ok keep on studying like this as self-study is a key route for achieving success
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