Fixed Assets Grade 12 Notes Accounting Study Guides pdf

Fixed assets are items that a company plans to use over the long term to help generate income. Fixed assets are most commonly referred to as property, plant, and equipment. Current assets are any assets that are expected to be converted to cash or used within a year.

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:

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.

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!)

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:

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

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)

OR

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 TO THE BALANCE SHEET

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

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 TO THE BALANCE SHEET