Articles About Accounting

Accounting for fixed assets and Curent Assets

• Introduction

An important distinction is made in accounting between "current assets" and " "fixed assets".

Current assets  are assets that can be cashed or can be used as money in the short term (within one accounting cycle). Current assets are those that form part of the circulating capital of a business. They are replaced frequently or converted into cash during the course of trading. The most common current assets are stocks, trade debtors, and cash. Compare current assets with fixed assets. A fixed asset is an asset of a business intended for continuing use, rather than a short-term, temporary asset such as stocks.

Fixed assets is tangible assets acquired by the company in the form of ready-made or to be built first, which is used in the operation of the company, not intended for sale within the framework of normal business activities and have a useful life of more than one year. Fixed assets must be classified in a company's balance sheet as intangible, tangible, or investments. Examples of intangible assets include goodwill, patents, and trademarks. Examples of tangible fixed assets include land and buildings, plant and machinery, fixtures and fittings, motor vehicles and IT equipment.

How should the changing value of a fixed asset be reflected in a company's accounts?

The benefits that a business obtains from a fixed asset extend over several years. For example, a company may use the same piece of production machinery for many years, whereas a company-owned motor car used by a salesman probably has a shorter useful life.by accepting that the life of a fixed asset is limited, the accounts of a business need to recognise the benefits of the fixed asset as it is "consumed" over several years. This consumption of a fixed asset is referred to as depreciation.

Financial Reporting Standard 15 (covering the accounting for tangible fixed assets) defines depreciation as follows:

"the wearing out, using up, or other reduction in the useful economic life of a tangible fixed asset whether arising from use, effluxion of time or obsolescence through either changes in technology or demand for goods and services produced by the asset.'

A portion of the benefits of the fixed asset will be used up or consumed in each accounting period of its life in order to generate revenue. To calculate profit for a period, it is necessary to match expenses with the revenues they help earn.

In determining the expenses for a period, it is therefore important to include an amount to represent the consumption of fixed assets during that period (that is, depreciation).

In essence, depreciation involves allocating the cost of the fixed asset (less any residual value) over its useful life. To calculate the depreciation charge for an accounting period, the following factors are relevant:

- the cost of the fixed asset;

- the (estimated) useful life of the asset;

- the (estimated) residual value of the asset.

What is the relevant cost of a fixed asset?

The cost of a fixed asset includes all amounts incurred to acquire the asset and any amounts that can be directly attributable to bringing the asset into working condition.

Directly attributable costs may include:

- Delivery costs

- Costs associated with acquiring the asset such as stamp duty and import duties

- Costs of preparing the site for installation of the asset

- Professional fees, such as legal fees and architects' fees

Note that general overhead costs or administration costs would not be included as part of the total
costs of a fixed asset (e.g. the costs of the factory building in which the asset is kept, or the cost of the maintenance team who keep the asset in good working condition)

The cost of subsequent expenditure on a fixed asset will be added to the cost of the asset provided that this expenditure enhances the benefits of the fixed asset or restores any benefits consumed.

This means that major improvements or a major overhaul may be capitalised and included as part of the cost of the asset in the accounts.

However, the costs of repairs or overhauls that are carried out simply to maintain existing performance will be treated as expenses of the accounting period in which the work is done, and charged in full as an expense in that period.

What is the Useful Life of a fixed asset?

An asset may be seen as having a physical life and an economic life.

Most fixed assets suffer physical deterioration through usage and the passage of time. Although care and maintenance may succeed in extending the physical life of an asset, typically it will, eventually, reach a condition where the benefits have been exhausted.

However, a business may not wish to keep an asset until the end of its physical life. There may be a point when it becomes uneconomic to continue to use the asset even though there is still some physical life left.

The economic life of the asset will be determined by such factors as technological progress and changes in demand. For purposes of calculating depreciation, it is the estimated economic life rather than the potential physical life of the fixed asset that is used.

What about the Residual Value of a fixed asset?

At the end of the useful life of a fixed asset the business will dispose of it and any amounts received from the disposal will represent its residual value. This, again, may be difficult to estimate in practice. However, an estimate has to be made. If it is unlikely to be a significant amount, a residual value of zero will be assumed.

The cost of a fixed asset less its estimated residual value represents the total amount to be depreciated over its estimated useful life.

 Long-Term Debt And Short-Term Debt

• Short-term debt is debt that must be repaid no later than the age of the debt is one year or one accounting period

•  Long-term debt is owed to a third party company to be repaid in more than a year. There is a pretty clear difference in the short-term debt on repayment or maturity.

·         Definition of 'Short-Term Debt'

An account shown in the current liabilities portion of a company's balance sheet. This account is comprised of any debt incurred by a company that is due within one year. The debt in this account is usually made up of short-term bank loans taken out by a company.

·         Investopedia explains 'Short-Term Debt'

The value of this account is very important when determining a company's financial health. If the account is larger than the company's cash and cash equivalents, this suggests that the company may be in poor financial health and does not have enough cash to pay off its short-term debts. Although short-term debts are due within a year, there may be a portion of the long-term debt included in this account. This portion pertains to payments that must be made on any long-term debt throughout the year

Example simple present about positif negative and introgative

1.      (+) This account is comprised of any debt incurred by a company that is due within

      one year

(-) This account does not consist of any debts incurred by the company due within

      one year

(?) What is the time period given the company's debt?

2.      (+) an assets may be seen as having a physical life and an economy

(-) an asset not to be seen as having physical and economic life

(?) What can be seen from the above assets?

3.      (+) they are replaced frequently or converted into cash during the course of trading

(-) they are not often replaced frequently or converted into cash during the trade

(?) why they are often change into cash for trade?

4.      (+) it is necessary to match expenses with the revenues they help earn

(-) don’t need to match expenses with revenues they help get

(?) why the need to match expenses with revenue they help get?

5.      (+) depreciation involves allocating the cost of the fixed asset over it's useful life

(-) depreciation does not involve the allocating the cost of fixed assets over their

      useful lives that

(?)why the depreciation involves allocating the cost of fixed assets over their useful

     lives that?

6.      (+) in the u.k, long term debts are known as 'long term loans"

(-) in the uk, is not long-term debt known as' long-term loans "

(?) where was long-term debt known as' long-term loans "?

7.      (+) Fixed assets is the tangible assets acquired by the company in the form of ready-

      made

(-) Fixed assets is not itangible assets that are acquired by the company in the form

      of  ready-Made

(?) what is the fixed assets?

8.      (+) Short-term debt is debt that must be repaid no later than the age of the debt is

      one year or one accounting period

(-) short-term debt is debt that must be paid not be later than the age of the debt is

      one year or one accounting period

(?) what is the short-term debt?

9.      (+) long-term debt is owed ​​to a third party company that will be paid off in more

      than a year.

(-) long-term debt is owed ​​to a third party company that will not be repaid in more

      than a year.

(?) what is the long-term debt?

10.  (+) Current assets are assets that can be cashed or can be used as money in the short

     term

(-) Current assets are assets that can not be cashed or can be used as money in the

     short term

(?) what is the current assets?