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Chapter 5 –
Fixed assets
LEARNERS SHOULD BE ABLE TO:
Demonstrate understanding of the concept of fixed/tangible asset
register.
Record the acquisition of fixed/tangible assets. Calculations and recording
of depreciation:
• On cost price (straight line method)
• Diminishing balance method
Demonstrate understanding of how fixed/tangible assets are recorded
when they are fully depreciated.
Record the disposal of fixed/tangible assets:
• At the beginning of the financial year
• During a financial year
• At the end of a financial year
Definition of fixed assets
Fixed assets are the most valuable assets that a business can own. They have a reasonable
long lifespan and they are not purchased with the intention of reselling them, but rather to
produce an income for the business. Accounts for fixed assets:
Land and buildings
Vehicles
Equipment
,Business owners must keep accurate record of the purchase price and carrying value of
their fixed assets. These records are kept in a fixed asset register. They have to keep these
records:
For financial statement purposes
To assist in tax return
As record if the business wants to sell the assets at a later stage
For proper internal control measures.
Fixed asset management and the role of the fixed asset manager
Fixed Asset Management:
- The accounting process of
keeping track of all the
business’s fixed assets.
This management process is essential for the following reasons:
Financial accounting purposes:
Financial accounting includes the correct book entries for the purchase and sale of
the fixed asset, recording depreciation and carrying the asset at the correct value in
the books of the business.
To determine the maintenance cycle of an asset:
Fixed asset stock needs to be maintained regularly and on time in order to extend the
lifespan and to ensure the efficient use of an asset in order to generate maximum
profits.
To prevent the theft and misuse of the asset:
Fixed assets need to be looked after and must be used responsibly by employees. The
business must ensure that the fixed asset is being used for the purpose for which it
was bought and the employees who mismanage or abuse the fixed asset must be
disciplined. Management must formulate policies to ensure that fixed assets are used
responsibly by all its employees and must put control measures in place to ensure
responsible use.
, Acquisition of fixed assets
Mortgage bond:
Fixed assets can be purchased
- A loan taken out at a in one of three ways:
commercial bank in order
• For cash
to buy property; repaid
• On credit
over a long period, usually
• As a trade-in (vehicles &
20 years; classified as a
equipment only)
non-current liability
Imputed expenses: Carrying value:
Cost price:
- to attribute a part of - The cost price
- The price at
the cost of an asset less all the
which the asset
as an expense for depreciation
was purchased
that particular year accumulated to
date
Fixed assets are usually bought on credit, when property is purchased on credit, the
business will secure a loan referred to as a mortgage bond. This type of loan is usually
repaid within 20 years and the interest is accrued to this loan on a monthly basis for as long
as the bond is being repaid. The title deed, which proves ownership of the property, will be
kept at the bank for as long as the bond is being repaid and will only be handed over to the
client once the final payment has been made.
Vehicles purchased on credit are, in most cases, subject to vehicle finance. All banks have a
vehicle finance division and the car dealer will arrange this finance on the client’s behalf.
The bank will pay the car dealer the full price and the client will repay the bank, including
interest. The loan on a vehicle is repaid withing 5 years.
The fixed asset register
This register contains all relevant information pertaining to every tangible (fixed) asset
owned by the business. The acquisition of each asset will be entered into this register. Each
asset will be recorded on a separate page in the fixed asset register and updated will take
place regularly.
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