In today’s accounting tutorial, we look at the difference between gross fixed assets and net fixed assets and why this is important.
If you are in a hurry, the only difference between the two is accumulated depreciation:
Gross Fixed Assets – Accumulated Depreciation = Net Fixed Assets
However, if you would like a little more information, then please read on.
What Are Fixed Assets?
These are assets that the reporting entity intends to utilise beyond the next financial reporting period. So let’s say the balance date is 31 March X2, then, if an asset is categorised as fixed, this means the business intends to be using this asset beyond 1 April X3.
Of course, the question of what an asset deserves a quick look here too. The International Financial Reporting Standards (IFRS) Conceptual Framework defines an asset as an economic benefit(s) the reporting entity can control and arise from past events.
What is Accumulated Depreciation?
We aren’t going to go into too much detail about depreciation in this tutorial as we have a separate article covering it in detail; you can find that here. However, in summary, depreciation represents the consumption of economic benefits from an asset over an estimated useful life for the reporting entity. Or other words, it reflects the reducing utility that one can derive from the asset for the entity controlling it.
Accumulated depreciation is what they call a contra asset account. It is an “asset” account; however, it has a natural credit balance (it could have a zero balance but shouldn’t have a debit balance). And is “set-off” against its respective asset account. Which is what we will look at next.
Fixed Gross Assets and Net Fixed Assets Disclosure Example
In our example, using ABC Ltd, let’s say they still own the digger they purchased back on March 20 for $850,000. It’s now March 31, and the accounting team is preparing the year-end accounts for management and external shareholders. And let’s say ABC will depreciate the digger on a straight-line basis at 10 per cent. Ten per cent helps keeps the blog maths easy for an accountant.
So all we have to work out in this simple example is the depreciation for the 11 days ABC has owned the digger for in the current financial year. The information we have is:
- Purchase price: $850,000
- Depreciation rate: 5% straight line
- Number of days in the reporting period from purchase date: 11 days
$850,000 x 5 per cent x (11 / 365) = $1,281 (0 dp)
So the depreciation charge (expense) for the year ended is $1,281 on this asset. Now let’s move onto a few journal entries (can’t go wrong with a few debits and credits). As copies from our earlier article, the purchase entry would be:
|March 20||Plant Machinery||$850,000|
Now we have to bring into account the depreciation expense for the new digger:
Next is the financial reporting disclosure. You will typically find no gross fixed asset disclosure in published accounts; instead, the balance sheet (or statement of financial position) will show the net fixed assets. If you are doing this work, say for a test, you might include it. Whichever way you disclose it on your balance sheet, the figures you will be using are:
- Gross Fixed Asset: $850,000
- Accumulated Depreciation: $1,281
- Net Fixed Asset: $848,719
Below is an extract from ABC’s balance sheet, showing an example of how this disclosure.
And that is about it for an explanation of fixed gross assets and net fixed assets. We look forward to your feedback on this article or any of our other work on the site.