Fixed Assets and Depreciation

NOW! feel relax, take a deep breath and go through this. I am sure you will think its very easy to understand the accounting just like eating peanuts. Just like writing a, b, c .... and 1,2,3 .....

Here, I will demonstrate to you a simple accounts prepared for a simple business like "selling burgers".

Now you imagine a person selling burgers at a burger stall on the road-side.

What are the physical things that you see?

1. a counter with a Castor wheel
2. an umbrella
3. a showcase
4. a burner
5. a frying plate

These are the physical features that you can see, touch and can last for maybe 5 years.

So this is the catch - in accounting principles; this is what we term as or classified as "Fixed Asset". Since they will last for 5 years meaning it will depreciate over 5 years. Thus in terms of percentage they will depreciate 100/5 = 20% per year. Meaning every year the value that you purchased those assets (Book Value) will have to be depreciated by 20%. Example if the TOTAL ASSETS are US$5,000.00 therefore this amount will be reduced by US$1,000.00 (20% of US$5,000.00) every year. Beginning of next year the value of the Fixed Assets will be US$5,000.00 - US$1,000.00 (depreciation) = US$4,000.00.

Now, this Fixed Assets category will be reported in a "Balance Sheet" - you will learn this later.

Normally, at the point of purchasing the assets; the invoice, delivery order, purchase order and official receipt are clipped together with a "Payment Voucher".

Then it will be recorded in a "Cash Book" as payment was made (the Invoices were first filed and recorded as "Accounts Payable" and posted in a General Ledger.

Together with other accounts, beginning of next month a "Trial Balance" will be extracted as at last month end e.g. 31 May 2009..... Only then a "Trading, Profit & Loss Account" and "Balance Sheet" are prepared.

You can just use Microsoft office "Excel" Templates to register these records.

You observed there are many accounting terms or classifications mentioned above. Do not worry if you do not understand. For those who had qualified and practicing is OK. I just do not want to be naive as to be so ignorant for not mentioning them.

Please take note of the different "terminology" used in "US Accounting" compared to "UK Accounting". Below are some examples:
• accounts payable - creditors
• accounts receivable - debtors
• inventory - stocks
Continue to visit my blog to see more of these ..............