The total depreciation of an asset cannot exceed its 3. depreciable value. Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more
The total depreciation of an asset cannot exceed its 3. depreciable value.
Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,
The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.
Let me show you an example to make it more understandable,
Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,
The estimated useful life of the machine – 10 years.
Residual value at the end of 10 years – $50,000.
Method of depreciation – Straight-line method.
The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:
Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)
Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).
Thus, the total depreciation of an asset cannot be more than its depreciable value.
See less
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expeRead more
Fictitious assets can be defined as those fake assets which save revenue for the company. These do not exist physically but also do not qualify as intangible assets. These are merely the expenses or losses that are not fully written off in the accounting period in which they are incurred. These expenses are amortized over a period of time.
These assets do not have any realizable value except for the cash outflow. These are created to delay the recognition of the expense and defer it to future periods.
Fictitious assets actually qualify as an expense but are treated as assets only for the fact that they are expected to give returns over a course of more than one year. Examples are Advertisement expenses, preliminary expense, etc.
Treatment
Fictitious assets are shown on the assets side of the balance sheet under the head miscellaneous expenditure. A part of these expenses are shown in the profit and loss statement and the remaining amount is carried forward to the following years.
For example, a company Timber Ltd. incurs expenses relating to advertisement of its products worth 8,000,000 and this advertisement campaign can earn revenue for the company for around 10 years. Hence, such expense of 8,000,000 would be amortized over a period of 10 years.
For the first year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 7,200,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet.
For the second year, an amount of 800,000 (8,000,000/10) would appear in the profit and loss statement as expense and the rest 6,400,000 would appear as advertisement expense under the Miscellaneous expenditure on the assets side of the balance sheet. And so on.
We can say that fictitious assets are deferred revenue expenditures as well as intangible assets. But goodwill, etc are not fictitious assets. Hence, all fictitious assets are intangible assets but all intangible assets are not fictitious assets.
Common fictitious assets that could generally be seen are:
- Advertisement expenses
- Preliminary expenses
- Discount allowed on the issue of shares
- Loss incurred on issue of debentures
- Underwriting Commission
See less