How to Account for Fixed Assets?
For every fixed asset, the law makes it compulsory for a business to provide for depreciation of the asset every year of its useful life.
Accounting Standard 6 issued by the Institute of the Chartered Accountants of India defines ‘depreciation’ as “a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortization of assets whose useful life is predetermined.” The amount to be charged as depreciation depends on the total cost of the asset, expected useful life of the asset and its residual cost.
There are several methods of allocating depreciation over the useful life of the assets. Those most commonly used methods are the straight-line method and the reducing-balance method.
Choose the best method depending on the type of asset, the nature of the use and circ*mstances prevailing in the business.
