CHAPTER 5

Fixed assets
Progression

 Grade 10: Calculation and recording of depreciation

 Grade 11: Recording of acquisition and disposal of fixed assets

 Grade 12: Interpreting and reporting on movement, valuation and

control of fixed assets

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Introduction
 Fixed assets are usually the most valuable assets that a business owns.

 Fixed assets are often called tangible assets.

 These assets have a reasonably long lifespan.

 Fixed assets are not purchased with the intention of reselling them, but rather to
produce an income for the business.

 The three accounts used to record the fixed assets of a business are :

 Land and Buildings (also known as Property and Plant)

 Vehicles
 Equipment (this will include furniture and fittings).
 Business owners must keep an accurate record of the purchase price and
carrying value of their fixed assets.

 These records are kept in the fixed asset register.

 The fixed asset register is important part of the internal controls of a business.
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Fixed asset management
Fixed asset management is the accounting process of keeping track of all the
business’s fixed assets and is essential for the following reasons:

 For financial accounting purposes:

 this includes keeping accurate records of purchases, sales, depreciation

and carrying value of the fixed assets of the business.

 To determine the maintenance cycle of an asset :

 fixed assets should be maintained regularly and on time in order to
extend their lifespan.

 To prevent the theft and misuse of the asset:

Management should implement adequate control measures to ensure that:
 fixed assets are physically safeguarded.
 fixed assets are used responsibly by employees.
 fixed assets are only used for the purpose for which they were bought.
 disciplinary action is taken against employees who mismanage or abuse
the use of fixed asset.
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Acquisition of fixed assets
 Fixed assets can be purchased in one of three ways:
 for cash
 on credit
 as a trade-in (vehicles and equipment only).

 Land and buildings (property) and vehicles are usually purchased on credit.

 When property is purchased on credit, the business will secure a loan,

referred to as a mortgage bond.

 A mortgage bond is usually repaid within 20 years and interest accrues on

a monthly basis while the bond is being repaid.

 Vehicles purchased on credit are usually subject to vehicle finance.

 The financing bank pays the car dealer the full purchase price and the
client will repay the bank, including interest.

 The loan on a vehicle is repaid within five years.

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The fixed asset register
 The fixed asset register is used to record all the relevant information pertaining to every
each fixed asset owned by the business.

 Each asset is recorded on a separate page in the fixed asset register.

 The acquisition of each fixed asset is entered in this register.

 The depreciation relating to each fixed asset is also recorded in the fixed asset register.

 The fixed assets register is an important part of a business’s internal control system.

 The following is an extract from the fixed assets register:

ASSETS REGISTER OF …

Make: _________________________ Cost price: ____________________

Model: ________________________ Depreciation: __________________

Date of purchase: _______________ Date of sale: ___________________

Purchased from: ________________

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Depreciation
 Assets, such as vehicles and equipment, decrease in value over time as
a result of wear and tear.

 This wear and tear is called depreciation.

 Depreciation is “the cost of using the asset” and is calculated annually at

the end of the financial year.

 Depreciation is written off against the asset and is an expense.

 Depreciation is not physically paid and is therefore considered an imputed

expense.

 There are two methods of depreciating fixed assets:

 Straight-line method – a fixed percentage of the cost price is
depreciated every year.
 Diminishing balance method – a fixed percentage of the carrying
value is depreciated every year.

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Example: Recording and depreciating an asset using the straight-line
method
Information:
• Donovan owns a successful roofing business, D & M Roofing Contractors.
• On 1 March 2013, he purchased a second vehicle, a 2012 Nissan 4×4 2.7 diesel van, on credit from
Africa Cars for R167 500.
• He put down a deposit of R15 000 and the remainder was financed by West Bank vehicle finance.
• The vehicle is depreciated at 10% per annum on the cost price.
• The financial year ends on 28 February.

Entries in the fixed asset register:

Fixed Asset Register of D & M Roofing Contractors Folio 2

Make: Nissan 4×4 2.7 Diesel (CA 857 325) Purchased from: Africa Cars

Model: 2012 Cost: R167 500

Date purchased: 1 March 2013 Depreciation: 10% p.a. on the cost price

Annual Accumulated Carrying

Date Calculation
depreciation depreciation value

1 March 2013 Cost price: R167 500 - - R167 500

28 February 2014 R167 500 × 10% R16 750 R16 750 R150 750

28 February 2015 R167 500 × 10% R16 750 R33 500 R134 000

28 February 2016 R167 500 × 10% R16 750 R50 250 R117 250
Example: Recording and depreciating an asset using the diminishing balance method

Information:

• D & M Roofing Contractors also owns tools and machines, known as equipment.
• Among these tools are five Makita drills, which cost R14 000 when they were bought on 1 March 2013.
• The equipment is depreciated at 20% on the diminishing balance (carrying value).

Entries in the fixed asset register:

Fixed Asset Register of D & M Roofing Contractors Folio 3

Make: Makita drills (5) Purchased from: Hyper Tools

Model: - Cost: R14 000

Date purchased: 1 March 2013 Depreciation: 20% p.a. on the diminishing balance

Annual Accumulated Carrying

Date Calculation
depreciation depreciation value

1 March 2013 Cost price: R14 000 - - R14 000

28 February 2014 R14 000 × 20% R2 800 R2 800 R11 200

28 February 2015 R11 200 × 20% R2 240 R5 040 R8 960

28 February 2016 R8 960 × 20% R1 792 R6 832 R7 168

Recording the acquisition of fixed assets

 When a fixed asset is purchased, the asset account is debited.

Land and buildings Vehicles Equipment

800 000 180 000 47 500

 If the fixed asset is purchased …

 for cash then the Bank account is credited.

 on credit then the Creditors control account is credited.

Bank Creditors control

47 500 800 000

180 000

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Recording fully depreciated fixed assets
 A business may choose to keep (and continue to use) a fixed asset that has
exceeded its expected lifespan and as been fully depreciated.

 However, according to the historical cost concept:

an asset must be recorded in the books of the business at its original cost price for as long as
the business owns the asset.

 So the fixed asset must retain a carrying value (of at least R1) in the books.

Example: Recording a fully depreciated fixed asset

• John Baker owns a machine that is still productive and economically viable for him to operate.
• He bought the machine for R160 000 ten years ago and has depreciated it at 10% p.a. on cost price.
• This means that he wrote off R16 000 per annum for 9 years: R16 000 × 9 = R144 000
• He has written off R144 000 on this asset and the carrying value in the books is currently R16 000.
• In the tenth year he will only write off R15 999 on the machine so that it retains a carrying value of R1 in the books.
• So the cost price of the machine will remain at R160 000 in the Equipment account; and
the accumulated depreciation on the machine will be R159 999 for as long as they own it.
• This machine will no longer be depreciated at the end of the financial year.

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Disposal of fixed assets
 The process that takes place when a business sells its old fixed assets
is called asset disposal.

 If a fixed asset is sold for cash, then the cash amount received is
entered in the Cash Receipts Journal.

 All other transactions relating to the disposal of a fixed asset are

recorded in the General Journal.

 When a fixed asset is sold, it must be removed from the records of the
business.

 The price the business receives for the fixed asset is the selling price.

 Asset disposal may take place:

 on the first day of the financial year;
 on the last day of the financial year, or
 during the financial year.
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Example: Asset disposal on the first day of the financial year
Information:
On 1 March 2017, Donovan, the owner of D & M Roofing Contractors, sold the Nissan 4×4 2.7 diesel van for
R90 000 cash to K Murray. The cost price of the vehicle was R167 500 and the accumulated depreciation on
the vehicle on the date of sale was R67 000.
Balances in the General Ledger of D & M Roofing Contractors on 1 March 2017:
Vehicles R325 500
Accumulated depreciation on vehicles R98 600

Process used to record the disposal of a fixed asset :

Step 1: Remove the cost price of the vehicle being sold from the Vehicles account.

Debit: Asset Disposal Credit: Vehicles

Step 2: Remove the accumulated depreciation to date of sale of the vehicle being sold from the Accumulated Depreciation on Vehicles account.

Debit: Accumulated Depreciation on Vehicles Credit: Asset Disposal

Step 3: Enter the selling price into the Asset Disposal account.

If sold for cash: Debit: Bank Credit: Asset Disposal

If sold on credit: Debit: Debtors Control Credit: Asset Disposal
If traded in: Debit: Creditors Control Credit: Asset Disposal

Step 4: Calculate the profit or loss on the sale of the asset.

 Carrying value = Cost price – Accumulated depreciation = R167 500 – R67 000 = R100 500
 Profit/loss on sale of asset = Selling price – Carrying value = R90 000 – R100 500 = – R10 500

Therefore the business made a loss on the sale of the vehicle: Debit: Loss on Sale of Asset Credit: Asset Disposal

If the business had made a profit on the sale of the vehicle: Debit: Asset Disposal Credit: Profit on Sale of Asset
Example: Asset disposal on the first day of the financial year (continued)

Recording the transactions in the journals:

Cash Receipts Journal of D & M Roofing Contractors for March 2017

CRJ1
Sundry accounts
Doc Analysis of
Day Details Fol. Bank Amount Details
no. receipts
R988 1 K Murray 90 000 00 90 000 00 90 000 00 Asset disposal

General Journal of D & M Roofing Contractors for March 2017 GJ1

Day Details Fol. Debit Credit

1 Asset disposal 167 500 00

Vehicles 167 500 00
(Transfer of cost price to asset disposal)

Accumulated depreciation on vehicles 67 000 00

Asset disposal 67 000 00
(Transfer of accumulated depreciation)

Loss on sale of asset 10 500 00

Asset disposal 10 500 00
(Loss made on sale of asset)
Example: Asset disposal on the first day of the financial year (continued)

Posting to the General Ledger:

General Ledger of D & M Roofing Contractors
Balance Sheet accounts

Dr Vehicles Cr
2017 2017
Mar 1 Balance b/d 325 000 00 Mar 1 Asset disposal GJ1 167 500 00

Dr Accumulated Depreciation on Vehicles Cr

2017 2017
Mar 1 Asset disposal GJ1 67 000 00 Mar 1 Balance b/d 98 600 00

Nominal accounts

Dr Asset Disposal Cr
2017 2017 Accumulated depreciation
Mar 1 Vehicles GJ1 167 500 00 Mar 1 on vehicles GJ1 67 000 00
Bank CRJ1 90 000 00
Loss on sale of asset GJ1 10 500 00
167 500 00 167 500 00

Dr Loss on sale of asset Cr

2017
Mar 1 Asset disposal GJ1 10 500 00
Example: Asset disposal on the first day of the financial year (continued)

Effect on the accounting equation:

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 100 500 Carrying value of vehicles decreased – 10 500 Loss on sale of asset is an expense

+ 90 000 Bank increased

Note: Carrying value = Cost price – Accumulated depreciation = R167 500 – R67 000 = R100 500
Example: Asset disposal on the last day of the financial year
Information:
Sibusizwe owns a furniture manufacturing business called Woodcraft.
On 28 February 2017 (the last day of the financial year), Sibusizwe sold an old bench saw for
R2 500 on credit to Peter’s Wood Works. The bench saw had cost R3 000 and the accumulated
depreciation on the bench saw on 1 March 2016 was R570.
The business depreciates its equipment at 10% p.a. on the diminishing balance.

Balances in the General Ledger of Woodcraft on 1 March 2016:

Equipment R13 750
Accumulated depreciation on equipment R3 160

Calculations:

 Depreciation on bench saw from 1 March 2016 to 28 February 2017 = (R3 000 – R570)  10%
= R2 430 × 10% = R243

 Therefore total accumulated depreciation on bench saw to date of sale = R570 + R243
= R813

 Carrying value = Cost price – Accumulated depreciation = R3 000 – R813

= R2 187

 Profit/loss on sale of asset = Selling price – Carrying value = R2 500 – R2 187

= R313

 Total depreciation on equipment for 1 March 2016 to 28 February 2017 = (R13 750 – R3 160)  10%
= R10 590 × 10% = R1 059
Example: Asset disposal on the last day of the financial year (continued)

Recording the transactions in the General Journal:

General Journal of Woodcraft for February 2017 GJ12

Day Details Fol. Debit Credit Debtors control
Debit Credit
28 Asset disposal 3 000 00
Equipment 3 000 00
(Transfer of cost price to asset disposal)

Accumulated depreciation on equipment 813 00

Asset disposal 813 00
(Transfer of accumulated depreciation)

Peter’s Wood Works 2 500 00 2 500 00

Asset disposal 2 500 00
(Asset sold on credit)

Asset disposal 313 00

Profit on sale of asset 313 00
(Profit made on sale of asset)

Depreciation 1 059 00
Accumulated depreciation on equipment 1 059 00
(Depreciation on equipment calculated at 10%
p.a. on the diminishing balance)
Example: Asset disposal on the last day of the financial year (continued)

Posting to the General Ledger:

General Ledger of Woodcraft

Balance Sheet accounts Nominal accounts

Dr Equipment Cr Dr Asset Disposal Cr

2016 2017 2017 2017 Accumulated depre-
Mar 1 Balance b/d 13 750 Feb 28 Asset disposal 3 000 Feb 28 Equipment 3 000 Feb 28 ciation on equipment 813
Balance c/d 10 750 Profit on sale of asset 313 Debtors control 2 500
13 750 13 750 3 313 3 313
2017
Mar 1 Balance b/d 13 750

Dr Depreciation Cr

Dr Accumulated Depreciation on Equipment Cr 2017 Accumulated depre- 2017

Feb 28 ciation on equipment 1 059 Feb 28 Profit and loss 1 059
2017 2016
Feb 28 Asset disposal 813 Mar 1 Balance b/d 3 160
2017
Balance c/d 3 406 Feb 28 Depreciation 1 059 Dr Profit on Sale of Asset Cr
4 219 4 219 2017 2017
2017 Feb 28 Profit and loss 313 Feb 28 Asset disposal 313
Mar 1 Balance b/d 3 406
Example: Asset disposal on the last day of the financial year (continued)

Effect on the accounting equation:

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 2 187 Carrying value of equipment decreased + 313 Profit on sale of asset is income

+ 2 500 Debtors increased

Note: Carrying value = Cost price – Accumulated depreciation = R3 000 – R813 = R2 187
Example: Asset disposal during the financial year
Information:
Jamie owns a bakery called Quality Bake in Main Street, Robertson.
On 1 September 2017, Jamie sold an old delivery vehicle to A Moola for R40 000 cash. The cost
price of the vehicle was R60 000 and the accumulated depreciation on the vehicle on 1 March
2017 was R18 000. The business depreciates its vehicles at 10% p.a. on the cost price.
The financial year ends on 28 February.

Balances in the General Ledger of Quality Bake on 1 March 2017:

Vehicles R200 000
Accumulated depreciation on vehicles R49 500

Calculations:
 Depreciation on old delivery vehicle from 1 March 2017 to 1 September
= R60 000  10%  6/12
2017
= R3 000

 Therefore total accumulated depreciation on old delivery vehicle to date of sale = R18 000 + R3 000
= R21 000

 Carrying value = Cost price – Accumulated depreciation = R60 000 – R21 000
= R39 000

 Profit/loss on sale of asset = Selling price – Carrying value = R40 000 – R39 000
= R1 000

 Depreciation on remaining vehicles for 1 March 2017 to 28 February 2018 = (R200 000 – R60 000)  10%
= R140 000 × 10% = R14 000
Example: Asset disposal during the financial year (continued)

Recording the transactions in the General Journal:

General Journal of Quality Bake for September 2017 GJ7

Day Details Fol. Debit Credit

1 Asset disposal 60 000 00

Vehicles 60 000 00
(Transfer of cost price to asset disposal)

Depreciation 3 000 00
Accumulated depreciation on vehicles 3 000 00
(Depreciation at 10% p.a. on the cost price)

Accumulated depreciation on vehicles 21 000 00

Asset disposal 21 000 00
(Transfer of accumulated depreciation)

Asset disposal 1 000 00

Profit on sale of asset 1 000 00
(Profit made on sale of asset)

General Journal of Quality Bake for February 2018 GJ12

Day Details Fol. Debit Credit

28 Depreciation 14 000 00
Accumulated depreciation on vehicles 14 000 00
(Depreciation at 10% p.a. on the cost price)
Example: Asset disposal during the financial year (continued)

Posting to the General Ledger:

General Ledger of Quality Bake

Balance Sheet accounts Nominal accounts

Dr Vehicles Cr Dr Asset Disposal Cr

2017 2017 2017 2017 Accumulated depre-
Mar 1 Balance b/d 200 000 Sep 1 Asset disposal 60 000 Sep 1 Vehicles 60 000 Sep 1 ciation on vehicles 21 000
30 Balance c/d 140 000 Profit on sale of asset 1 000 Bank 40 000
200 000 200 000 61 000 61 000
2017
Oct 1 Balance b/d 140 000

Dr Depreciation Cr
Dr Accumulated Depreciation on Vehicles Cr 2017 Accumulated depre- 2018
2017 2017 Sep 1 ciation on vehichles 3 000 Feb 28 Profit and loss 17 000
Sep 1 Asset disposal 21 000 Mar 1 Balance b/d 49 500 2018 Accumulated depre-
2017 Feb 28 ciation on vehicles 14 000
30 Balance c/d 31 500 Sep 1 Depreciation 3 000 17 000 17 000
52 500 52 500
2018 2017
Feb 28 Balance c/d 45 500 Oct 1 Balance b/d 31 500
2018 Dr Profit on Sale of Asset Cr
Feb 28 Depreciation 14 000
2018 2017
45 500 45 500 Feb 28 Profit and loss 1 000 Sep 1 Asset disposal 1 000
2018
Mar 1 Balance b/d 45 500
Example: Asset disposal during the financial year (continued)

Effect on the accounting equation:

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 39 000 Carrying value of vehicle decreased + 1 000 Profit on sale of asset is income

+ 40 000 Cash increased

Note: Carrying value = Cost price – Accumulated depreciation = R60 000 – R21 000 = R39 000
Example: Completing the note for fixed assets in the financial statements
Information:
Balances in the books of Thandi Fashion Outlet on 1 September 2017, the first day of the financial year:
Property R240 000 Accumulated depreciation on vehicles R45 000
Vehicles R125 000 Accumulated depreciation on equipment R3 420
Equipment R11 400
Transactions:
1 Sep 2017 An old cash register was sold to Mpho Stores for R650. The cash register had cost R1 400 and the accumulated
depreciation on 31 August 2017 was R780. A new cash register was bought on credit from Office Suppliers for R2 300.
1 Mar 2017 A new vehicle was bought on credit from Sizwe Motors for R62 500.
30 Apr 2017 The property was renovated at a cost of R60 000.
31 Aug 2018 Depreciation on vehicles amounted to R22 250 and on equipment to R1 230.

Note for fixed assets in the financial

statements:
3. FIXED/TANGIBLE ASSETS
Land and
Vehicles Equipment Total
buildings
Carrying value at beginning of year 240 000 80 000 7 980 327 980
Cost 240 000 125 000 11 400 376 400
Accumulated depreciation – (45 000) (3 420) (48 420)
Movements
Additions 60 000 62 500 2 300 124 800
Disposals at carrying value – - (620) (620)
Depreciation for the year – (22 250) (1 230) (23 480)
Carrying value at end of year 300 000 120 250 8 430 428 680
Cost 300 000 187 500 12 300 499 800
Accumulated depreciation – (67 250) (3 870) (71 120)
Solutions to activities
 Activity 5.1  Activity 5.14
 Activity 5.2  Activity 5.15
 Activity 5.3  Activity 5.16
 Activity 5.4  Activity 5.17
 Activity 5.5  Activity 5.18
 Activity 5.6  Activity 5.19
 Activity 5.7  Activity 5.20
 Activity 5.8  Activity 5.21
 Activity 5.9  Activity 5.22
 Activity 5.10
 Activity 5.11  Informal assessment 5.1
 Activity 5.12  Informal assessment 5.2
 Activity 5.13

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