Depreciation and Fixed assets

Depreciation and Fixed Assets

Fixed assets must be differentiated from current assets and investment assets. Current assets are assets with a value available to the business in the short term, which is usually taken to mean up to a year. These are cash and assets used in the course of business, such as stock and debtors(money owing by customers). Investment assets are held as an investment rather than for use in the business, such as shares.
Fixed assets are assets expected to realize value to the business in the long term, which is usually taken to mean more than a year.

Examples of Fixed Assets

  • Motor vehicle
  • Plant and machinery
  • Fixtures and fittings
  • Computers
  • Freehold property
  • Leasehold property

Depreciation and Fixed Assets

Before depreciating a fixed asset, it is as well to confirm that it still exists. Usually the answer is a readily ascertainable yes, but it is as well to check. If the asset has been destroyed or lost, it should be written off rather than depreciated, and if it has been sold, the correct bookkeeping entries should have been made. We need to depreciate fixed assets because in almost all cases they will lose value over time.

The reasons for this include:

Wear and tear

Wear and tear Assets wear out with use. Your old car with 100,000 miles on the clock is less valuable than when it was new. Furthermore, assets may be subject to rust, rot etc. even if not used.

Obsolescence

Some assets lose value through obsolescence, even if working perfectly and with every prospect of a long working life ahead. Computers are an obvious example.

Depletion

A quarry is the classic example. A quarry that once contained 100,000 tons of aggregates is not as valuable when some of the aggregates have been extracted

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