Fixed Assets and Depreciation

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Fixed Assets and Depreciation What is Depreciation? It is the decrease in value of an asset This is because of use or obsolesence (product becoming outdated) Is Depreciation Expense, Income, Assets or Liability? Depreciation is an Expense (it is reduction in value of asset, so it is expense or loss) New Car Purchased for 500000 Difference of Rs 100000 Value After 1 Year 400000 is Depreciation This Car This Depreciation is is Fixed Asset Expense (Shown in Balance sheet) (Shown in Profit and loss) Is Depreciation Cash expense or Non Cash Expense It is a Non Cash Expense it is just recorded in accounts as an expense, it is not paid to anyone What is Accounting Effect of Depreciation Effect on Accounting Equaiton Example Furniture Purchased by cash for 30000 Depreciation 10% = 3000 Value after Depreciation = 30000 - 3000 = 27000 Furniture Purchased by cash 30000 Effects It leads to Increase in Fixed Assets (Furniture) of 30000 Since amount paid for Purchasing,it leads to decrease in cash/bank of 30000 Depreciation on Furniture Rs 3000 Effects Depreciation is an expense,it leads to decrease in Profit, so decrease in capital It also leads to decrease in Fixed Assets (Furniture) of 3000 Question Started business with cash Rs 70000 Credit purchase of goods Rs 18000 Payment made to creditors in full settlement Rs 17500 Purchase of machinery for cash Rs 20000 Depreciation on machinery @ 10% Transaction 1 Started business with cash 70000 Effect Cash is an Asset which Increases by 70000 Capital also increases by 70000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Business commenced with Rs 70000 cash 70000 0 70000 Transaction 2 Credit purchase of goods Rs 18000 Effect Stock is an Asset which Increases by 18000 Creditor is a liabilty which increases by 18000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Stock Creditors Old Balance 70000 = 0 + 70000 Credit purchase of goods Rs 18000 +18000 = 18000 + New Balance 70000 18000 = 18000 + 70000 Transaction 3 Payment made to creditors in full settlement Rs 17500 Effect Cash is an Asset which decreases by 17500 Creditor is a liabilty which will reduce by 18000 Discount received will increase the capital by 500 So Accounting Equation appears as follows Assets = Liability + Capital Cash Stock Creditors Old Balance 70000 18000 = 18000 + 70000 Payment made to creditors in full settlement Rs 17500 -17500 = -18000 + 500 New Balance 52500 18000 = 0 + 70500 Transaction 4 Purchase of machinery for cash Rs 20000 Effect Machine is an asset which will increase by 20000 Cash is an asset which will reduce by 20000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Stock Machinery Creditors Old Balance 52500 18000 = 0 + 70500 Purchase of machinery for cash Rs 20000 -20000 +20000 = 0 + New Balance 32500 18000 20000 = 0 + 70500 Transaction 5 Depreciation on machinery @ 10% Effect Machine is an asset which will reduce by 2000(10% of 20000) Capital will also reduce by 2000 as it is an expense So Accounting Equation appears as follows Assets = Liability + Capital Cash Stock Machinery Creditors Old Balance 32500 18000 20000 = 0 + 70500 Depreciation on machinery @ 10% -2000 = 0 + -2000 New Balance 32500 18000 18000 = 0 + 68500