No matter the size of your business, two requirements stay compulsory in every stage of your business’s life-cycle – first, accounting and second, tax/tax returns filing. So what if you have a Chartered Accountant who takes care of both? As a business owner, you ought to know how your incomes/expenses, profits/losses show up in your accounting books and finally impact your taxability. Towards this end, we will bring you a series of articles that will tell you about how to account for various categories of account heads. In this article, we will discuss Fixed Assets in and out.
What is a Fixed Asset?
Fixed asset is an asset of a business held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. They can be categorized as:
- Vehicle: This will include the car you use for business purposes provided it is registered in the business’s name or the name of the founder(s).
- Furniture & Fixtures: This will include the desks, chairs, workstations and the other fittings in your office work station.
- Computer Equipment: As the name suggests, this will include the desktops, laptops, routers, dongles and data-storage devices used for business purposes.
- Office Equipment: This will include the air-conditioner, water-dispenser, microwave, telephone, refrigerator, etc. that are used in your office or business premises
What is the cost of a particular Fixed Asset?
The cost of a fixed asset for the purpose of accounting and taxation will include not only the cost of the asset, but also the expense(s) that are incurred to get it installed and working like delivery charges, acquiring charges such as stamp duty and import duties, costs of preparing the site for installation of the asset, professional fees, such as legal fees and architects’ fees etc.
How to Account for Fixed Assets?
For every fixed asset, the law makes it compulsory for a business to provide for depreciation of the asset every year of its useful life. Accounting Standard 6 issued by the Institute of the Chartered Accountants of India defines ‘depreciation’ as “a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.” The amount to be charged as depreciation depends on the total cost of the asset, expected useful life of the asset and its residual cost. There are several methods of allocating depreciation over the useful life of the assets. Those most commonly used methods are the straight-line method and the reducing-balance method. Choose the best method depending on the type of asset, the nature of the use and circumstances prevailing in the business.
Income Tax Provisions:
The Income tax Act provides for charging depreciation against the Profit and Loss Account of a business. However, section 32(1) lays down conditions for claiming depreciation. They are:
- The assets must be owned, wholly or partly, by the assesse.
- Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.
- TThe asset should be actually used for the purpose of business or profession of the assesse.
- Depreciation is not allowable on the cost of land.
- Depreciation is mandatory from AY 2002-03 and shall be allowed or deemed to have been allowed irrespective of claim made in the profit & loss account or not.
- Where the asset is not exclusively used for the purpose of business or profession, the depreciation shall be allowed proportionately with regards to such usage of assets (sec. 38). Section 32(1) provides that depreciation is to be computed at the prescribed percentage (Click here for depreciation rates) on the written down value of the asset, calculated with reference to actual cost of the assets minus the depreciation already charged.
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