All businesses and organisations are required by law to provide an accurate evaluation of their assets in their end-of-year financial reports. Assets are items of value owned by a business and include Fixed Assets, Current Assets, and Intangible Assets,
An asset is said to be 'Fixed' if it is NOT sold or consumed by the business for trading purposes. Fixed Assets include land, buildings, vehicles, equipment and furniture. Generally speaking a business does not change or dispose of these assets on a weekly or monthly basis, and that is why they are described as Fixed.
A 'Current Asset', such as Cash, is an asset that is constantly flowing in and out of the business. The amount of Cash held by a business changes in value on a day-to-day basis. Stock, the value of materials and goods held by the business/organisation, is also a current asset. Materials and goods are purchased and sold on a daily basis as part of the businesses operation. Debtors, the amount of money people owe the business/organisation) is another current asset. The amount of money owed by Debtors will change on a daily business.
An 'Intangible Asset' is an asset that has no physical existence but yet the business/organisation can sell it. "Intellectual Property" is an example and so is "Goodwill". The perculiarly named 'Goodwill' arises when a business can be sold for far more than the value of its fixed and current assets. For example, a business may have total assets of $100,000 but someone is willing to buy the business for $150,000 because it returns very good profits. In such circumstances, the extra $50,000 is called goodwill.
In reality the true value of any asset, is what someone is willing to pay for it and not what price was paid at the time of purchase by the business. Therefore, until an asset is sold, its value can only be estimated or calculated. For example, a vehicle might have been purchased for $20,000 but now its three years old and is estimated to be worth only $12,000 if put up for sale.
The process of estimating the value of an asset at any one point in time, is dependent upon the perceived life duration of the asset. If the asset has life duration of 3 years, then it will lose 1/3rd (or 33%) of its value each year. After 3 years it will be deemed to be valueless. This gradual fall in the value of an asset is called depreciation.
For instance if you bought a computer on 1 January 2007 for $3,000, the asset would be written off as follows:
| For the year ended 31 December, 2007 | $1,000 |
33% |
| For the year ended 31 December, 2008 | $1,000 |
33% |
| For the year ended 31 December, 2009 | $1,000 |
33% |
| Total write down over three-year period | $3,000 |
100% |
The above example would hold true if the allowed depreciation were 33%. If the rate of depreciation were 20% then it would take 5 years to write down the asset completely.
In order to calculate the total value of a businesses' assets and the total of amount of depreciation, it is necessary to accurately record details of every purchase (addition) of a fixed asset and every sale (disposal) of a fixed asset.
The following details should be recorded:
| Additions | Disposals |
| The date of the purchase of the asset | The date of the sale of the asset |
| The supplier of the asset | The purchaser of the asset. |
| The cash price of the asset at the time of its purchase. | The cash price that the asset was sold for |
| Details of the asset | The total of accumulated depreciation at the time of the sale. |
The requirement to keep such details requires the construction and maintenance of an Asset database or register.
Example of the required record keeping for an asset - a vehicle over the period that it was owned by a business.
The details can be kept in a card or electronic database:
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Make: Mitsubishi |
Model: Magna Wagon |
Year: 1995 |
Supplier: Keema Mitsubishi |
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Purchase Price: $30,000 |
Date of Purchase: 1/05/95 | |||||||
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Date |
Depreciation Rate |
Depreciation Method |
Depreciation Charge |
Net Book Value |
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31/12/95 |
12% |
Straight Line |
$2,400.00 |
$27,600 |
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31/12/96 |
12% |
Straight Line |
$3,600.00 |
$24,000 |
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1/2/97 |
12% |
Straight Line |
$300.00 |
$23,700 |
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Disposal Price: $23,000 |
Date of Disposal: 1/02/97 |
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Profit/Loss on Disposal: ($700) |
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The keeping of information about assets in a card or electronic database register can also be easily kept using computer database software such as Microsoft Access or on a spreadsheet e.g. Microsoft Excel.
The above example, the Net Book Value represents the reducing value of the asset as depreciation is deducted.
Because assets are being bought and sold at different times, and because different rates of depreciation apply to different assets, it is not usually possible to assess TOTAL depreciation accurately by any way other than working out depreciation on an individual asset basis.
To further complicate the problem, there are two different ways to calculate depreciation:
· Straight line method
· Reducing balance method
Straight line method - if an asset costs $100 and the rate of depreciation is 20% per year, the amount of depreciation each year will be $20.00 (the purchase price [$100] * the rate of depreciation [20%]) .
Reducing balance method - if an asset costs $100 and the rate of depreciation is 20% per year, in the first year the depreciation will be $20, in the second year $16.00, in the third year $12.80, and so on as per example below:
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Purchase price |
$100.00 |
A |
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Depreciation for the year - 20% |
$20.00 |
A * 20% = B |
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Net Book Value at the end of the year 1 |
$80.00 |
A - B = C |
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Depreciation for the year - 20% |
$16.00 |
C * 20% = D |
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Net Book Value at the end of the year 2 |
$64.00 |
C - D = E |
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Depreciation for the year - 20% |
$12.80 |
E * 20% = F |
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Net Book Value at the end of the year 3 |
$51.20 |
E - F = G |
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