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 ..............

TYPES OF ACCOUNTING

• Financial Accounting is "a major branch of accounting involving the collection, recording and extraction of financial information, and the summary of it in the form of a periodic profit and loss account, a balance sheet and a cash flow statement in accordance with legal, professional, and capital market requirements". Association of Chartered Accountants (ACA) professional graduates best designated as Financial Accountant and upgraded as Finance Manager – Financial Controller.

• Management Accounting is another branch of accounting performed within an organization to provide information only accessible to its decision-makers. Cost accounting falls within this management accounting which normally required by factories or manufacturing concerns. Chartered Institute of Management Accountants professional graduates suitable to undertake as Cost Accountant or Management Accountant or Corporate Accountant.
• Open-book accounting is an accounting principle that aims to improve accounting transparency of organizations. Normally, cooperatives and non-profit organizations such as sports club, cultural groups and charity establishments.
• Tax accounting is the accounting needed to comply with jurisdictional tax regulations. Certified Public Accountants, Chartered Accountants and those qualified Fellowships in the respective fields are best to resume the responsibilities and public trusts as Auditors and Tax Consultants.
• Accounting scholarship is the academic discipline which studies the theory of accountancy.
• Government accounting is a non-profit accounting which uses “public tax payers’ fund” spent in running the states and federal governments.
• Project Accounting is applicable for the nature of works-in-progress where the expected date of completion is determined over a span of time.
• Development Accounting is appropriate for property development such as “housing estates or developers” where completion period for each type of houses is more than 2 years. Some developers divide the land into few phases and varies the type of houses deemed to be constructed.

The related, but separate financial audit comprises internal audit and external audit. External audit - carried out by independent auditors - examines the financial statements and accounting records in order to express an opinion as to the truth and fairness and adherence to Generally Accepted Accounting Principles (GAAP). Commonly used GAAP include the US Financial Accounting Standards Board (FASB), which issues FASB Pronouncements including Statements of Accounting Standards, and the International Accounting Standards Board (IASB), which issues International Financial Reporting Standards (IFRS). Many other countries have instituted local standards resulting in a local country GAAP. Internal audit and/or management audits aim at providing information for management usage, and is typically carried out by employees.

History of Accounting

Accounting started way back from the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia and the Egyptian Old Kingdom). It facilitated the creation of accurate records of the quantities and relative values of agricultural products, methods that were formalized in trading and monetary systems by 2000 B.C. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. The Islamic Quran also mentions simple accounting for trade and credit arrangements.

In the twelfth-century A.D., the Arab writer, Ibn Taymiyyah, mentioned in his book Hisba (literally, "verification" or "calculation") detailed accounting systems used by Muslims as early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilizations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliph of ISLAM, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslim rulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.

The development of mathematics and accounting were intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late-15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy.