Accounting Standard (AS) 10 Accounting for Fixed Assets

By:-

NAMAN NEERAJ NISHANT PAWAN NUPUR

WHAT IS FIXED ASSETS?

Fixed assets are long-term or relatively permanent assets. They are tangible assets because they exist physically. They
are owned and used by the business and are not offered for sale as part of normal operations.
EXAMPLE : Land, Building, Plant, Machinery, Vehicle, Equipment, etc.

FIXED ASSETS

Tangible Assets

Natural Resources

Intangible Assets

Is the purchased item long-lived?

yes

no Expense

Is the asset used in a productive purpose?

yes Fixed Assets no Investment

 LAND

Purchase Price Sales Taxes Permits from govt. agencies Brokers commissions Surveying Fees Removing unwanted buildings, less any salvage Grading and leveling

 BUILDING

Architects Fee Engineers Fee Insurance cost incurred during construction Interest on money borrowed to finance construction Sales Tax Repairs (purchase of existing building) Permits from govt. agencies

MACHINERY & EQUIPMENT

Sales Tax Freight Installation Repairs (purchase of used equipment) Insurance while in transit Assembly Modification for user Testing for use Permits from govt. agencies

COST OF ACQUIRING FIXED ASSESTS EXCLUDES:

Vandalism Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from govt. agencies

Capital Expenditure & Revenue Expenditure

Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure. Expenditure that improve the asset or extend its useful life are capital expenditure.

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.

Capital Expenditure & Revenue Expediture

Any expenditure, the benefit of which is received during the current year itself is termed as revenue expenditure. Such expenditure does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity.

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.

An Illustration of Capital and Revenue Expenditure

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

purchased 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.

Question on Acquisition Cost

The following expenditures relate to a chemical plant: 1. Customs duty on the plant 2. 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 port 7. 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.