ACCOUNTING

GRADE 11
CHAPTER 2
FIXED ASSETS
Theory
Compiled by:
Mrs Brimecombe

1
 TABLE OF CONTENTS Page
1. Management of tangible assets 3

2. Concepts 3
3. Asset register 4

4. Depreciation 5

5. Methods of calculating depreciation 5

6. Calculating depreciation 6
7. Purchase and disposal of assets 8

8. Purchase of asset 8

9. Disposal of asset 9
10. Format – Note on Tangible Asset 12

11. Summary of ledger accounts 13

12. Summary of tangible asset note 14

13. Internal control 15

14. Ethics 15

15. Problem solving 15

16. Important notes 16

2
1. MANAGEMENT OF TANGIBLE ASSETS
LAND AND BUILDINGS VEHICLES AND EQUIPMENT

 The value APPRECIATES  The value DEPRECIATES

 Limited supply  Wear and tear
 Cost of building increases  Obsolete – new technology

2. CONCEPTS
CONCEPT EXPLANATION

Depreciation A loss in value of an asset in an accounting period

Accumulated Is the total amount of depreciation deducted from the fixed asset
Depreciation since it was purchased.
Carrying value Original cost price less the depreciation that has accumulated
over the period in which the asset was in possession of the
business.
Age of Assets Businesses should monitor their assets to identify assets that
need to be replaced. Assets that are old due to wear and tear
should be replaced with efficient assets.
Replacement Rate How often the business determines a fixed asset will be replaced.

Replacement Value When a fixed asset has to be replaced, the business needs to
of Assets look if it is worth replacing the old asset and what it will cost them
to buy the new asset.
Lifespan of assets Estimated length of time the asset can reasonably be used to
generate income and be of benefit to the business.
Asset register A register showing each asset individually.

Residual amount The full amount of an asset cannot be written off as long as it is
in the business’ possession. The carrying value is kept at R1

3
3. ASSET REGISTER

DETAILS ON AN ASSET REGISTER

 Description of asset  Depreciation – method of calculation

 Serial number  Amount of depreciation

 Receipt/invoice  Accumulated depreciation

 Date of purchase  Value of asset

 Supplier’s details  Expected residual value

 Purchase price 

4
4. DEPRECIATON
 Any asset purchased for less than R7 000 may be deducted in full in the year in which the
asset is purchased.
 The following factors must be considered in determining the expected life of an asset:
 How long the taxpayer expects the asset to last.
 How the taxpayer expects to use the assets
 Whether the asset is likely to become obsolete.
 Whether the effective life of the asset is limited to the life of a particular project.
 SCHEDULE OF WRITE-OFF PERIODS ACCEPTABLE TO SARS
 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-2012-47-Wear-And-
Tear-Depreciation-Allowance.pdf
Item Number of Item Number
years of years
Cellular telephones 2 Office equipment - mechanical 5
Computers (mainframe or 5 Office equipment – electronic 3
servers)
Computers (personal) 3 Passenger cars 5
Delivery vehicles 4 Photocopying equipment 5
Fax machines 3 Trucks (heavy-duty) 3
Furniture & Fittings 6 Trucks (other) 4
The wear and tear may be claimed on either the DIMINISHING BALANCE METHOD or on
COST PRICE, in which certain requirements apply

5. METHODS OF CALCULATING DEPRECIATION

STRAIGHT LINE METHOD DIMINISHING BALANCE

METHOD

 Reducing balance method/

 Cost price method/  Carrying value method/
 Fixed cost method/  Book value method/
 Fixed instalment method  Declining method
Writing off – shorter period Writing off – longer period

Calculated on the cost price each Book value =

year Cost price – Accumulated depreciation

5
6. CALCULATING DEPRECIATION

STRAIGHT LINE METHOD

𝑅𝑎𝑡𝑒 𝑚𝑜𝑛𝑡ℎ𝑠
𝐶𝑂𝑆𝑇 𝑥 𝑥 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
100 12
DIMINISHING BALANCE
METHOD

𝑅𝑎𝑡𝑒 𝑚𝑜𝑛𝑡ℎ𝑠
𝐵𝑂𝑂𝐾 𝑉𝐴𝐿𝑈𝐸 𝑥 𝑥 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
100 12

ACCUMULATED BOOK
COST
DEPRECIATION VALUE

ACCOUNTING PERIOD – 12 MONTHS

OLD/REMAININ NEW SOLD

FROM THE DATE FROM THE
G12 MONTHS
OF PURCHASE BEGINNING OF
UNTIL END OF THE YEAR UNTIL
ACCOUNTING THE DATE WHEN
PERIOD SOLD

6
 HOW TO GET THE REMAINING/ OLD

STRAIGHT LINE METHOD

A
Cost

Balance b/d x Asset disposal x

x Balance c/d x
Additions

Balance beginning – asset disposal = old

DIMISHING BALANCE METHOD

METHOD 1 METHOD 2
A
A
Cost
Book value/ carrying value
Balance b/d x Asset disposal x
Balance b/d x Asset x
Addition x Balance c/d x
disposal
Additions x (Beg + Updated dep) s
A
Depreciation x Accumulated depreciation
(old + new + sold) x Asset disposal x Balance b/d x
Balance c/d
Depreciation x
Balance c/d x Sold
Balance in beginning Depreciation x
- Asset disposal in beginning Old + new
= Book value in the beginning

Cost Balance beginning – Asset

disposal
- Accumulated Beginning – Asset disposal
depreciation
= Book value

7
7. PURCHASE AND DISPOSAL OF ASSETS

WHEN ARE TANGIBLE ASSETS DISPOSED AND PURCHASED?

ACCOUNTING PERIOD – 12 MONTHS

BEGINNING DURING THE YEAR END OF YEAR

OF YEAR

From the beginning Asset sold =

12 SOLD of the year until the
MONTHS 12 months
date when sold

NEW From the date of New asset

purchase until end = no calculation
of accounting
period

8. PURCHASE OF ASSETS
 The business wants to keep up-to-date with new technology.
 Running costs of current assets may be too high.
 The existing equipment has become old / out of date

A A
BANK

VEHICLES/ LAND AND BUILDINGS/ Vehicles/ X

EQUIPMENT Land and buildings/
Equipment
Bank X
L
Creditors x
CREDITORS CONTROL
control
Vehicles/ X
Land and buildings/
Equipment

8
9. DISPOSAL OF ASSET
 Existing asset is too old or has outlived its useful life
 Vehicles have been involved in accidents
 Damaged assets that cannot be used by a business anymore.
 Asset may be obsolete

METHODS OF DISPOSING ASSETS

METHOD ACCOUNTS EFFECTED

Sold for cash Bank

Sold on credit Debtors Control

Donated Donations

Personal use Drawings

Traded-in Creditors Control

Scrapped Write off, no payment

Written off due to damages Accrued income/ Insurance claim

9
ASSET DISPOSAL CREDITED – THE REST DEBITED

10
 If ASSET DISPOSAL appears in the NOMINAL ACCOUNT SECTION in the PRE-ADJUSTMENT TRIAL BALANCE, then you
need to calculate the PROFIT/LOSS ON THE SALE OF THE ASSET.
 Types of adjustments:
 Calculate the depreciation on the asset sold.
 Make a correction
 A building was destroyed, the insurance company did pay out the claim.
 Theft of vehicles or equipment

11
10. FORMAT – NOTE ON TANGIBLE ASSET
Calculating cost

Calculating accumulated depreciation

Calculating book value

12
11. SUMMARY OF LEDGER ACCOUNTS
HISTORICAL COST HISTORICAL COST
A A
+ Land and Building - + Equipment -

Balance b/d x Sold x Balance b/d x Sold x

Purchase x Balance c/d x Purchase x Balance c/d x

Balance b/d x Balance b/d x

HISTORICAL COST
A A
+ Vehicle - + Accumulated dep. on Equipment -

Balance b/d x Sold x Sold x Balance b/d x

Purchase x Balance c/d x (Beg + updated) Dep(Sold) x

Balance b/d x Balance c/d x Dep (New + Old) x

Balance b/d x

MATCHING PRINCIPLE
A E
+ Accumulated dep. on Vehicles - + Depreciation -

Sold x Balance b/d x Accumulated X Profit and Loss X

depreciation on account
(Beg + updated) Dep(Sold) x
equipment/
Balance c/d x Dep (New + Old) x
vehicles
Balance b/d x

A - I + (+ E -)
+ Asset Disposal - Profit (Loss) on sale of Asset

Cost x Accumulated dep x

Closes off to the profit and loss
PROFIT x Selling price x account

LOSS x

13
12. SUMMARY OF TANGIBLE ASSET NOTE

Notes

 Beginning: Cost – Accumulated depreciation = Carrying value in beginning

 Carrying value beginning
+ Additions at cost
– Disposal at carrying value
– Depreciation for the year
= Carrying value end of year
 End: Cost beginning + additions at cost – disposal at cost = Cost at end
 End: Accumulated depreciation beginning
+ Depreciation (include old, new and sold)
[Depreciation calculated until day of purchase, must be included in
depreciation]
- Disposal at accumulated depreciation
= Accumulated depreciation at end
 End: Cost – Accumulated depreciation = Carrying value end of year

14
13. INTERNAL CONTROL
 Purchases of assets should be authorised by management.

 All fixed assets should be recorded in a Fixed Asset Register.

 Internal auditor ensures that proper records and documentation are in place.

 Receipts /invoices should be proof of purchase for insurance and external audit purpose.

 Fixed assets purchased must be labelled / bar coded or a serial number given for
identification and asset verification.

 Regular stock taking of assets and comparing against the asset register.

 Signing in and out of assets to track to track where they are and who used them.

 The movement of assets must be recorded in a logbook, e.g. vehicles

 All fixed assets must be insured against fire, theft, etc.

14. ETHICS
 Using of business fixed assets for personal gain.

 Incorrect recording of kilometres travelled using the business vehicle.

 Irregular fuel consumption by certain vehicles used by employees.

 Change in depreciation method used to calculate depreciation without informing SARS.

15. PROBLEM SOLVING

15
16. IMPORTANT NOTES

 Fixed assets are integrated into:

 Income Statement
 Balance Sheet
 Cash Flow Statement
 Budgets
 Cost Accounting
 VAT

 Fixed assets forms part of Paper 1 and Paper 2.

 Asset disposal opened and closed on the same day.

 Asset disposal can influence both the Balance sheet account and the Nominal account.

 If asset disposal appears in the Pre-adjustment Trial balance in the Nominal account
section – need to calculate the profit/loss on the sale of asset.

 Be aware if the transactions have been recorded or not when taking the information from
the pre-adjustment trial balance.

16