Fully Depreciated Assets

What are Fully Depreciated Assets?

Fully depreciated assets mean that the assets can no longer be depreciated for accounting or tax purposes and the value of the asset that remains is of the salvage value. This implies that the entire depreciation is been provided in the accumulated depreciation account and even though they have been completely depreciated either by SLM or WDM Method taking into account the useful life of the asset, they continue to be a part of the balance sheet unless they are sold or destroyed.

  • An asset can become fully depreciated due to two reasons:
    • The useful life of the asset has been expired.
    • The asset has been hit by an impairment charge, which is equal to the original cost of the asset.
  • In the balance sheet, if the accumulated depreciation on the liability side equals the original cost of the asset, it means the asset has been depreciated fully, and no further depreciation can be provided and charge to the profit & loss account as an expense.

Accounting for Fully Depreciated Assets

The statutory accounting bodies have laid down guidelines and accounting standards to be followed for an accounting of depreciation and fully depreciated assets. Globally as per the recent implementation of the IFRS, it will be mandatory for all the companies to prepare their financials as per the IFRS rules and regulations.

  • IAS 16 and IAS 36 are the accounting standards to be followed with regards to the property, plant & machinery & impairment of the assets.
  • The company also has to disclose the same in the notes to accounts regarding the treatment given to a fully depreciated asset.

1) If the Asset has been Fully Depreciated

Since assets are the major components of the business, the full depreciation charged on them may have a significant impact on the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

Balance Sheet of Depreciated Asset

2) If the Asset has been Sold

If the fully depreciated asset has been sold, the entire accumulated depreciation will be written offWritten OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more against the asset, and no impact will be given in the p&l statement since the total depreciation has already been recorded. The gain arising on the sale will be credited to p&l a/c has gained on the sale of assets.

Journal Entry of Depreciable Assets

Examples of Fully Depreciated Assets

Example #1

ABC limited buys machinery worth $ 2,00,000 on 01.01.2019 and depreciates the same on a slim basis for 10 years, assuming there will not be any salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000.read more of the term.

Solution:

In this case, ABC limited will record $20,000 per year as depreciation expense and credit the same to accumulated depreciation a/c. Below mentioned are the depreciation journal EntriesDepreciation Journal EntriesDepreciation Journal Entry is the journal entry passed to record the reduction in the value of the fixed assets due to normal wear and tear, normal usage or technological changes, etc. where depreciation account will be debited and the respective fixed asset account will be credited. The main objective of a journal entry for depreciation expense is to abide by the matching principle.read more ABC limited needs to pass in their books along with the necessary disclosure and presentation in the balance sheet.

  • Journal entry every year for the next 10 years:

Journal Entry 1

Journal Entry 1-1

  • Journal entry at the end of term:

Journal Entry 1-2

Example #2

Let’s assume that a company purchased a building at the cost of $10,00,000. The company then depreciated the buildingDepreciated The BuildingDepreciation of building refers to reducing the recorded cost of a building until the value of the structure either becomes zero or reaches its salvage value. In addition, it helps to map the revenue in the form of lease rental generated during the corresponding expenses.read more at a rate of $200,000 per year for 5 years. The current market value of the building is $ 50,00,000.

Solution:

The company will have to record $2,00,000 as depreciation expense by debiting the p&l a/c and crediting the accumulated depreciation a/c for 5 years. At the end of 5th year, the company’s current balance sheet will report the building at its cost of $1000,000 minus its accumulated depreciation of $10,00,000 (book value of $0) even if the building’s current market value is $50,00,000.

Conclusion

Thus there are rules and procedures laid down by the accounting bodies of every country to follow the accounting treatment for the fully depreciable assets so that all the companies are comparable to each other. The auditor of the company is required to give an opinion on the true & fairness of the company along with whether all the accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more laid down by the statutory bodies are followed by the company or not.

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