SS1 Third Term Financial Accounting Lesson Note – Introduction to Depreciation of Fixed Assets

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WEEK 2:                                                      

SUBJECT:     FINANCIAL ACCOUNTING

TOPIC:          REVISION OF LAST TERM’S WORK AND INTRODUCTION TO DEPRECIATION OF FIXED ASSETS

CONTENT:

(a) Meaning of fixed assets and cost of fixed asset

(b) Meaning of depreciation

(c) Reasons for depreciation

(d) Causes of depreciation 

Sub-Topic: 1: MEANING OF FIXED ASSETS AND COST OF FIXED ASSETS

Fixed assets are properties, plant and equipment which represent tangible resources of an organization.

Cost of fixed assets

This is the cost measured by the cash or cash equivalent price paid to obtain the asset, and to bring it to the location and condition necessary for its intended use. Thus, the purchase price, freight costs (transport), installation costs of a productive asset and other necessary incidental costs are considered as part of asset cost.

Illustration 1

An equipment for bread-making was ordered from the United State of America at an invoice price of N120,000, VAT N6,000, installation and start-up cost N55,000. What is the total cost of the machine?

                            Solution:                                        N

Invoice price                       –           120,000

Freight (transport)              –           20,000

VAT                                    –           6,000

Installation and start-up        –           55,000

Total                                        201,000

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