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Accounting Standard (AS) 10

Accounting for Fixed Assets

By:-

NAMANNEERAJ

NISHANT

PAWAN

NUPUR

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WHAT IS FIXED ASSETS?

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Fixed assetsare long-term or relatively

permanent assets. They are tangible

assetsbecause they exist physically. Theyare owned and used by the business and

are not offered for saleas part of normal

operations.

EXAMPLE : Land, Building, Plant, Machinery, Vehicle, Equipment, etc.

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FIXED ASSETS

Natural ResourcesIntangible

AssetsTangible Assets

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Is the purchased item

long-lived?

Expense

noyes

Is the asset used in a

productive purpose?

yes no

Fixed Assets Investment

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LAND

Purchase Price

Sales Taxes

Permits from govt. agenciesBrokers commissions

Surveying Fees

Removing unwanted buildings,less any salvage

Grading and leveling

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BUILDING

Architects Fee

Engineers Fee

Insurance cost incurred during constructionInterest on money borrowed to finance

construction

Sales TaxRepairs (purchase of existing building)

Permits from govt. agencies

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MACHINERY & EQUIPMENT

Sales Tax

Freight

Installation

Repairs (purchase of used equipment)

Insurance while in transit

Assembly

Modification for userTesting for use

Permits from govt. agencies

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COST OF ACQUIRING FIXED ASSESTS

EXCLUDES:

Vandalism

Mistakes in installationUninsured theft

Damage during unpacking and

installingFines for not obtaining proper permits

from govt. agencies

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Capital Expenditure & Revenue Expenditure

Any expenditure which is incurred inacquiring or increasing the value of a

fixed asset is termed ascapitalexpenditure.

Expenditure that improve the asset or

extend its useful life arecapital

expenditure.

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Capital Expenditure & Revenue Expenditure

Examples of capital expenditure:

Expenditure which result in the acquisition of a fixed asset

such as land, building, plant, trade marks, etc. Such asset

would be used in the business for number of years.Expenditure in connection with the purchase or erection of a

fixed asset such as wages paid to workers for erecting

machines, cartage paid on acquiring plant and machinery, etc.

Expenditure incurred for establishing the business, e.g., the

cost of a patent, goodwill, preliminary expenses, etc.

Interest on capital during the period of formation of

company.

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Capital Expenditure & Revenue Expediture

Any expenditure, the benefit of which isreceived during the current year itself is

termed asrevenue expenditure.Such expendituredoes notresult in an

increase in theearning capacityof the

business but only helps inmaintainingtheexisting earning capacity.

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Capital Expenditure & Revenue Expenditure

Examples of revenue expenditure

Expenses incurred for the purpose of day to day running of

business such as manufacturing expenses, office expenses,

selling expenses, etc.Expenses incurred in the ordinary repairs and maintenance

of fixed assets

Payment for goods purchased for resale.

Depreciation on fixed assets.Purchase of raw material for converting it into finished

goods

Loss from sale of fixed assets.

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An Illustration of Capital and Revenue Expenditure

Rs. 5,200 spent on repairs before using a second

hand carpurchased recently.

Solution:-

It is capital expenditure because the expenses have been incurred before the

Car is put to use.

During the year Rs. 3,000 were spent on repairing of

various machines.

Solution:-It is revenue expenditure because the expenses have been incurred on the

repairs of existing machines. It is an expenditure of routine nature.

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Question on Acquisition Cost

The following expenditures relate to a chemical plant:

1. Customs duty on the plant2. Clearing charges paid to the Port Trust

3. Demurrage for delay in clearing the consignment

4. Freight

5. Transit insurance

6. Repair of some parts damaged while the plant was being unloaded at

the port7. Cost of calibrating the plant

8. Cost of removal and cleaning up the site.

Which of these should be capitalized as part of the cost of the plant?

Solution:-Every expenditure will be capitalized except (3) and (6) because

demurrage and repair charges are not normal to importing the

plant, and do not increase the value or productive capacity of the

asset.

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