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Accounting Standard (AS) 10
Accounting for Fixed Assets
By:-
NAMANNEERAJ
NISHANT
PAWAN
NUPUR
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WHAT IS FIXED ASSETS?
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Fixed assetsare long-term or relatively
permanent assets. They are tangible
assetsbecause they exist physically. Theyare owned and used by the business and
are not offered for saleas part of normal
operations.
EXAMPLE : Land, Building, Plant, Machinery, Vehicle, Equipment, etc.
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FIXED ASSETS
Natural ResourcesIntangible
AssetsTangible Assets
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Is the purchased item
long-lived?
Expense
noyes
Is the asset used in a
productive purpose?
yes no
Fixed Assets Investment
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LAND
Purchase Price
Sales Taxes
Permits from govt. agenciesBrokers commissions
Surveying Fees
Removing unwanted buildings,less any salvage
Grading and leveling
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BUILDING
Architects Fee
Engineers Fee
Insurance cost incurred during constructionInterest on money borrowed to finance
construction
Sales TaxRepairs (purchase of existing building)
Permits from govt. agencies
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MACHINERY & EQUIPMENT
Sales Tax
Freight
Installation
Repairs (purchase of used equipment)
Insurance while in transit
Assembly
Modification for userTesting for use
Permits from govt. agencies
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COST OF ACQUIRING FIXED ASSESTS
EXCLUDES:
Vandalism
Mistakes in installationUninsured theft
Damage during unpacking and
installingFines for not obtaining proper permits
from govt. agencies
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Capital Expenditure & Revenue Expenditure
Any expenditure which is incurred inacquiring or increasing the value of a
fixed asset is termed ascapitalexpenditure.
Expenditure that improve the asset or
extend its useful life arecapital
expenditure.
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Capital Expenditure & Revenue Expenditure
Examples of capital expenditure:
Expenditure which result in the acquisition of a fixed asset
such as land, building, plant, trade marks, etc. Such asset
would be used in the business for number of years.Expenditure in connection with the purchase or erection of a
fixed asset such as wages paid to workers for erecting
machines, cartage paid on acquiring plant and machinery, etc.
Expenditure incurred for establishing the business, e.g., the
cost of a patent, goodwill, preliminary expenses, etc.
Interest on capital during the period of formation of
company.
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Capital Expenditure & Revenue Expediture
Any expenditure, the benefit of which isreceived during the current year itself is
termed asrevenue expenditure.Such expendituredoes notresult in an
increase in theearning capacityof the
business but only helps inmaintainingtheexisting earning capacity.
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Capital Expenditure & Revenue Expenditure
Examples of revenue expenditure
Expenses incurred for the purpose of day to day running of
business such as manufacturing expenses, office expenses,
selling expenses, etc.Expenses incurred in the ordinary repairs and maintenance
of fixed assets
Payment for goods purchased for resale.
Depreciation on fixed assets.Purchase of raw material for converting it into finished
goods
Loss from sale of fixed assets.
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An Illustration of Capital and Revenue Expenditure
Rs. 5,200 spent on repairs before using a second
hand carpurchased recently.
Solution:-
It is capital expenditure because the expenses have been incurred before the
Car is put to use.
During the year Rs. 3,000 were spent on repairing of
various machines.
Solution:-It is revenue expenditure because the expenses have been incurred on the
repairs of existing machines. It is an expenditure of routine nature.
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Question on Acquisition Cost
The following expenditures relate to a chemical plant:
1. Customs duty on the plant2. Clearing charges paid to the Port Trust
3. Demurrage for delay in clearing the consignment
4. Freight
5. Transit insurance
6. Repair of some parts damaged while the plant was being unloaded at
the port7. Cost of calibrating the plant
8. Cost of removal and cleaning up the site.
Which of these should be capitalized as part of the cost of the plant?
Solution:-Every expenditure will be capitalized except (3) and (6) because
demurrage and repair charges are not normal to importing the
plant, and do not increase the value or productive capacity of the
asset.
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