8.1 Introduction to Fixed assets

  • All fixed assets purchased by a business are not intended for resale but to be used in the operation of the business to assist in generating a profit.
  • Fixed assets are recorded at the price the asset was purchased called COST PRICE (GAAP principle, called Historical cost.)
  • Separate records are kept for every fixed asset purchased in an asset register. Full details of very asset is recorded on the asset register and the depreciation for the financial year is calculated and recorded in the asset register and kept up to date at all times.
  • Fixed assets are depreciated at cost price/ straight line method or at carrying value/ diminishing balance/ or called book value method.
  • For internal control purposes, the assets and the registers are regularly monitored.
  • When the asset is sold the asset register is updated; additional depreciation calculated, to whom it was sold and closed off as the asset does not belong to the business anymore.
  • At the end of each financial year all the relevant fixed assets are depreciated. Any depreciation on assets sold during the year, form part of the depreciation amount disclosed in the Income Statement.

8.2 Asset register

Required:
Complete the following asset registers.
Information:
Example
Vehicle purchased: Cost price R80 000
Equipment: Cost price: R20 000
Transaction:

  1. Depreciation on vehicles must be brought into account at 20% per annum on cost price.
  2. Depreciation on equipment must be calculated at 10% per annum on carrying value.

A. DEPRECIATION AT COST PRICE:

Schie Traders No.1
Asset register

General ledger account: Vehicle account (B 6)
Item: TOYOTA delivery van 3 litre Date purchased: 1 March 2009
From whom purchased: Toyota Whiteriver Cost price: R80 000
Percentage Depreciation: 20 % p.a. at cost price/straight line method
Details of depreciation    

Details   Annual depreciation calculations  Accumulated depreciation  Book value or known as “Carrying value” 
End of first year       
End of second year       
End of third year       
End of fourth year       
End of fifth year       

Cost price – accumulated depreciation = book value/CARRYING VALUE
Fixed assets can only be depreciated till the fixed asset reach the scrap value of R1, therefore the CARRYING VALUE of the fixed asset cannot be less than R1.

Schie Traders No.2
Asset register

General ledger account: Equipment account (B 7)
Item: Office computer Date purchased:
From whom purchased: DARRYN FURNITURES Cost price: R20 000
Percentage Depreciation: 10% p.a. at carrying value/book value or called
diminishing value
Details of depreciation

Details   Annual depreciation calculations  Accumulated depreciation  Book value or known as “Carrying value” 
End of first year       
End of second year       
End of third year       
End of fourth year       
End of fifth year       

8.3 Residual value/or called scrap value of R1

Introduction
At the end of each financial year the asset register will be updated by calculating depreciation on all fixed assets. The total depreciation will then be recorded in the General Journal as the depreciation for the year. Depreciation is a legal way of decreasing the net profit so that less tax can be paid. However when the fixed asset reaches the end of its lifespan no more depreciation can be calculated. Depreciation can only be calculated till the asset reaches a carrying value of R1.
(Cost price minus Accumulated depreciation = carrying value)

  1. The R1 scrap value applies when an asset is depreciated. A Vehicle with a carrying value of RI cannot be depreciated the following year. (cost price minus accumulated depreciation = carrying value R100 000 – R 99 999 = R1
    DR VEHICLE ACCOUNT CR  
    Balance b/d 100 000   

    DR ACCUMULATED DEPRECIATION CR  
      Balance b/d 99 999
  2. When an asset is sold that has a carrying value of R1, the cost price and the total accumulated depreciation of the vehicle sold will be closed off to the Asset disposal account.
    ASSET DISPOSAL  
    Vehicle
    Profit on sale of asset
    100 000
    39 999
    (Because of the scrap value of R1, the profit is R39 999)
    139 999 
    Accum. depreciation
    Bank
    99 999
    40 000
    139 999
  3. However when an asset is sold that has not reached its carrying value of R1 yet but will soon, the scrap value principle (carrying value of R1) is not applied in practice.
    (In practice the scrap value principle is NOT applied when a fixed asset is sold that has not reached its R1 carrying value yet.)

Example
Vehicle is sold for R40 000 cash.
Cost price of vehicle: R100 000
Accumulated depreciation: R 90 000
Carrying value = R 10 000
Depreciation is calculated at 20% on Cost price

  • Additional depreciation: 100 000 × 20% = R20 000
  • The carrying value is already R10 000 and that means that depreciation can only be R10 000.
  • A fixed asset cannot be depreciated less than the cost price of the vehicle. (And not R9 999!)
ASSET DISPOSAL    
Vehicle
Profit on sale of asset

100 000
40 000
(Because the principle of R1 is not applied, the profit is R40 000)
140 000 

Accum. depreciation
Bank 
100 000 
40 000
140 000

8.4 Note to the Balance Sheet and Asset disposal

  1. Know the format and the steps to follow when an asset is sold.
  2. Know all the ledger accounts involved in calculating the
    • Additional depreciation when an asset is sold;
    • Depreciation of all the existing fixed assets at the end of the financial year (except Land and buildings).
    • Completion of Note 3 in the Balance sheet

Note 3 to the Balance sheet:

3. Property , plant and equipment   Land and buildings  Vehicles  Equipment  Total
Cost Price      60 000   
– Accumulated Depreciation      (20 000)  
= Carrying value on the last day of the previous year      40 000   
Movements:         
+ Additions at cost price      30 000   
– Disposals at carrying value (book value)      (5 000)   
– Depreciation for the year       (15 000)   
= Carrying value on the last day of current year     50 000  
Cost Price     85 000  
– Accumulated Depreciation at end of year     (35 000)  
= Carrying value on the last day of current year     50 000  

Steps to follow when disposing a fixed asset:

  1. Find the cost price of fixed asset sold and move/transfer it to the Asset Disposal account.
  2. Calculate any additional depreciation on fixed asset sold
  3. Move/Transfer the total depreciation on fixed asset sold to Asset Disposal account.
  4. Record the selling price of fixed asset sold in the Asset Disposal account.
  5. Calculate the profit or the loss on sale of fixed asset sold.
  6. At end of year, record the depreciation of the remaining fixed assets and new assets at the end of financial year.

General Ledger accounts

  • Study the following General Ledger accounts.
  • Ensure that you understand all the ledger accounts well.
  • The entries are examples of all possible transactions in the applicable general ledger accounts when fixed assets are bought or sold.
  • The procedure at the end of the financial year is also illustrated.

There are different formats of Note 3; however they have the same entries. Make sure that you use the format of one of the approved text books.

General Ledger of Star Traders

DR                                            VEHICLES (FA )                                        B1 CR  
2013
Mar 
 1  Balance B/d  180 000  2013
Dec 
31 Asset disposal GJ 100 000
May   10 Creditors control   CJ 150 000  2014
Feb
28 Balance c/d 280 000
Oct   10 Bank   CPJ 50 000           
        380 000          380 000
2014
Mar 
 1    B/d B/d 280 000           

 

DR                                  ACCUMULATED DEPRECIATION ON VEHICLES (-A)                               B2 CR        
2013
Dec 
 31 Asset Disposal (20000 + 5000)   GJ 25 000  2013
Mar
 1 Balance  B/d 60 000
    Balance   C/d 40 000  Dec  31 Depreciation (additional)  GJ 5 000
        65 000        B/d 65 000
2014
Feb  
 28 Balance  C/d 50 000     Balance (Accu. Depreciation. of
the remaining vehicles) 
GJ 40 000
          2014
Feb
 28 Depreciation (end of year) GJ  
          Mar  1 Balance  b/d  

 

DR                                           ASSET DISPOSAL (calculation)                                               B3 CR        
2013
Dec 
31  Vehicles    GJ 100 000 2013
Dec 
31   Accumulated depreciation on
vehicles
GJ 25 000
    Profit on sale of asset    GJ 5 000     Debtors control   GJ 80 000
        105 000           105 000

NOTE: Debtors control – when a vehicle was sold on credit
Bank – when a vehicle was sold for cash
Creditors control – when a vehicle was traded in to a secondhand dealer
Drawings – When owner took asset for own purposes
Donation – When a vehicle was donated.
Asset Disposal account must be closed off. (The Asset Disposal account will never have a balance because the difference will either be a profit on sale of asset or a loss on sale of asset)

DR                                                                DEPRECIATION (e)                                     N                   CR 
2013
Dec
31  Accumulated depreciation on
vehicles (additional)
GJ  5 000  2014
Feb 
 28 Profit and loss (depreciation for
the whole year)  
GJ 35 000
2014
Feb 
28 Accumulated depreciation on
vehicles (end of year) 
 GJ 10 000           
    Accumulated depreciation on
equipment
 GJ  20 000          
        35 000         35 000

 

DR                                PROFIT ON SALE OF ASSET (i)                        N CR        
2013
Dec 
 31 Profit and loss account  GJ  5 000  2014
Feb 
28  Asset disposal  GJ 5 000

OR

DR                                LOSS ON SALE OF ASSET (e)              N CR        
2013
Dec 
 31 Asset disposal   GJ  0 2014
Dec 
 31 Profit and loss account  GJ 0


Example 2 on note 3 in the Financial Statements
REQUIRED:
Complete Note 3 of the Balance sheet
INFORMATION:
Make use of the format and complete Note 3 from the financial Statements.
Name of Company _________________________________
BALANCE SHEET AT ________________________________

  Notes 
ASSETS   
Non-current assets  
Property, plant and equipment   


NOTES TO THE BALANCE SHEET

3. Property, plant and equipment   Vehicles 
Cost Price   
Accumulated Depreciation  
Carrying value on the last day of the previous year   
Movements:   
Additions at cost   
Disposals at carrying value (book value)  
Depreciation for the year   
Carrying value on the last day of current year  
Cost Price  
Accumulated Depreciation  
Carrying value on the last day of current year  


Memorandum of example 1
Calculation of Depreciation and cost price and carrying value

SCHIE TRADERS NO.1
Asset register

Percentage Depreciation: 20 % p.a. at cost price/straight line method
Details of depreciation    

Details   Annual depreciation Calculations Accumulated depreciation  Book value or known as “Carrying value” 
End of first year  80 000 × 20%= 16 000  16 000 64 000
(80 000 – 16 000)
End of second year 80 000 × 20%= 16 000 32 000 (80 000 – 32 000) 48 000
End of third year  80 000 × 20%= 16 000  48 000  32 000 
End of fourth year  80 000 × 20%= 16 000  64 000 16 000
End of fifth year 80 000 × 20%= 16 000
15 999
(Cannot depreciate R16 000, because of the scrap value of R1. Therefore can only depreciate R15 999)
(64 000 + 15 999)
79 999
(80 000 – 79 999)
R1

 

SCHIE TRADERS NO.2
Asset register

Percentage Depreciation: 10 % p.a. at carrying value/ book value or
called diminishing value
Details of depreciation  

Details   Annual depreciation Calculations Accumulated depreciation  Book value or known as “Carrying value” 
Cost price R20 000 End of first year 20 000 × 10% × 6/12
= 1 000
1 000 19 000
End of second year 19 000 × 10% = 1 900 (2 000 + 1 900)
2 900
(20 000 – 2 900)
17 100
End of third year  17 100 × 10% = 1 710 4 610 15 390
End of fourth year  15 390 × 10% = 1 539 6 149 13 851
End of fifth year 13 851 × 10% –
1 385, 10
7 534,10 12 465,90


Memorandum of example 2
REQUIRED:
Complete the note to the financial statements by using the given ledger accounts
Name of Company _________________________________
BALANCE SHEET AT ________________________________

  Notes   
ASSETS     
Non-current assets     230 000 
Property, plant and equipment (at carrying value)   230 000


NOTES TO THE BALANCE SHEET

3. Property, plant and equipment   Vehicles
Cost Price  180 000
Accumulated Depreciation   (60 000)
Carrying value on the last day of the previous year  120 000
Movements:  
Additions at cost (150 000 + 50 000)   200 000
Disposals at carrying value (100 000 – 25000) (75 000)
 Depreciation for the year (5 000 + 10 000) (15 000)
Carrying value on the last day of current year 230 000
Cost Price 280 000
Accumulated Depreciation (50 000)
Carrying value on the last day of current year 230 000

 

SCHEMATIC ILLUSTRATION OF FIXED ASSETS IN A BUSINESS        
ASSET REGISTERS     GENERAL LEDGER ACCOUNTS     BALANCE SHEET
DEPRECIATION AT COST PRICE     VEHICLES     ASSETS
ASSET REGISTER OF VEHICLE SOLD      Balance b/d 100 000 Asset disposal GJ  30 000  Non-Current Assets  
Cost price: R30 000 Depreciation: 20% at Cost price     Creditors con CJ  50 000  Balance c/d  120 000 Fixed assets at CV 76 120
Date  Depreciation  Accu Depr  CV    150 000    150 000  NOTES TO THE BALANCE SHEET
28 Feb’10  30 000 × 20% × 8/12 = 4000   4 000  26 000   Balance b/d  120 000      Note 3: FIXED ASSETS Vehicles Equipment Total
28 Feb’11 30 000 × 20% × 12/12
= 6000
10 000 20 000 ACCUMULATED DEPRECIATION ON VEHICLE (-A) Cost price 100 000 10 000 110 000
1 Sept’11 30 000 × 20% × 6/12 =
3000
13 000 17 000 Asset disposal 13 000 Balance b/d 40 000 –Accumulated depreciation (40 000) (3 600) 43 600
ASSET REGISTER OF REMAINING VEHICLE (10 000 + 3 000)   Depreciation 3 000 = Carrying value at begin 60 000 6 400 66 400
Cost price: R70 000 Accumulated depreciation:R30 000 Balance c/d 49 000 Depreciation 19 000 Movements      
      (14000+5000)   + Additions at Cost price 50 000 - 50 000
Date Depreciation Accu Depr CV   62 000   62 000 – Disposals at carrying value (17 000) - (17 000)
28 Feb’12 70 000 × 20% × 12/12 = 14000 44 000 26 000     Balance b/d 49 000 – Depreciation 2 + 6 (22 000) (1 280) (23 280)
                = Carrying value at end 71 000 5 120 76 120
ASSET REGISTER OF REMAINING NEW VEHICLE      ASSET DISPOSAL     Cost price at end 120 000 10 000 130 000
Cost price: R50 000 bought 6 months ago Vehicle GJ 30 000 Accum. depre 13 000 – Accumulated depreciation (49 000) (4 880) (53 880)
Date Depreciation Accu Depr CV Profit sale of asset 1 000 Bank 18 000 = Carrying value at end 71 000 5 120 76 120
28 Feb’12 50 000 × 20% × 6/12 = 5 000 5 000 45 000   31 000   31 000        
                Know the steps to dispose of a fixed asset well:
DEPRECIATION AT CARRYING VALUE DEPRECIATION  Step 1 Transfer the cost price to Asset disposal
  Accum depre: V 3 000 Profit and loss 23 280  Step 2 Calculate additional depreciation
ASSET REGISTER OF COMPUTER/EQUIPMENT Accum depre: V 19 000      Step 3 Transfer total depreciation to Asset disposal
Cost price: R10 000 depreciation: 20% on CV Accum depre: Eq 1 280      Step 4 Record the selling price in Asset disposal
Date Depreciation Accu Depr CV   23 280   23 280   a Cash  Bank
28 Feb’10 10 000 × 20% × 12/12
= 2000
2 000 8 000             On Credit Debtors control 
28 Feb’11  8 000 × 20% × 12/12 = 1600 3 600 6 400  PROFIT ON SALE OF ASSET        Trade in  Creditors Control
28 Feb’12 6 400 × 20% × 12/12 = 1280 4 880 5 120 Profit and loss 1 000 Asset disposal 1 000      By owner Drawings
                             Donated Donation
PROFIT AND LOSS ACCOUNT (F2) N      Step 5   Calculate the profit or loss on sale of asset   
Depreciation  26 280 Trading account  xxxx  AT THE END OF THE YEAR:   
    Profit on sale 1 000 Step 6 Calculate the depreciation of all old remaining and the new fixed assets  
Last modified on Wednesday, 08 September 2021 12:47