Step-by-Step Guide to Recording Asset Acquisitions in Accounting Books

Recording asset acquisitions in your books? Let’s break it down. It’s all about accuracy and compliance. Here’s your guide, step-by-step.

Step 1: Recognition of the Asset and Total Cost Calculation

First, determine what you will be purchasing, then add up all the associated fees. You need your purchase price, import duties, non-refundable taxes and direct costs: which have to be related to transportation and installation.

For example – Purchase of machinery ₹10,00,000 Transport is ₹50,000. Installation is ₹20,000. Total cost i.e. ₹10,70,000.

Step 2: Gather All Necessary Documents

Collect all relevant documents:

• Purchase invoice
• Transport receipts
• Installation bills
• Import duty receipts, if applicable

You’ll need these to back up your journal entries.

Step 3: Record the Acquisition in Your Journal

Accuracy while maintaining records of transactions is vital when acquiring any asset. Here is an example that explains this step: –

Date: 1st June 2024

Journal entry:

Debit: Machinery Account ₹10,70,000
Credit: Bank Account ₹10,70,000

Explanation: Debit the Machinery Account to show you have the asset. Credit the Bank Account to show you paid for it.

Step 4: Record Taxes and Duties Separately

If there are taxes or duties, record them clearly.

Example – Here’s an example of a journal entry for acquiring machinery. Debit the Machinery Account for ₹10,00,000, the Transportation Expense for ₹50,000, and the Installation Expense for ₹20,000. Also, debit the GST Input Credit (if applicable) for ₹1,80,000. Finally, credit the Bank Account for a total of ₹12,50,000.
Explanation: Split the costs and include GST Input Credit if you can claim it, reducing what you owe.

Step 5: Account for Depreciation

While recording depreciation, it is necessary to allocate the cost of a tangible asset over its profitable lifespan. It is advised to check rates for depreciation under Companies Act,2013.
Example: Machinery with a 10-year life, no residual value. Annual depreciation:

Depreciation Calculation: The depreciation calculation for the machinery is done by dividing the total cost of ₹10,70,000 by its useful life of 10 years, resulting in an annual depreciation expense of ₹1,07,000.

Year-end entry : At the year-end, you would record the depreciation by debiting the Depreciation Expense Account for ₹1,07,000 and crediting the Accumulated Depreciation Account for ₹1,07,000.
Explanation: Debit the Depreciation Expense Account to show the cost. Credit the Accumulated Depreciation Account to reduce the asset’s book value.

Step 6: Maintain a Fixed Asset Register

Keep a detailed fixed asset register. Track all acquisitions, disposals, and depreciation. Include:

• Asset description
• Date of acquisition
• Cost of acquisition
• Depreciation method and rate
• Accumulated depreciation
• Net book value

Step 7: Regular Review and Reconciliation

It is highly recommended for asset accounts to be reviewed and reconciled on a regular basis. This ensures accuracy in all entries.

Step 8: Proper Disclosures in Financial Statements

Proper disclosures in your financial statements are made compulsory by Ind AS 16 :-

• Original cost of acquired asset and total depreciation expense that has been charged against an asset since it was acquired.
• Depreciation methods that are used for disclosure
• Reconciliation of carrying amount at the beginning and end of the period
• Expected Contribution of an asset for revenue making activities.

Example of Disclosure: As of 31st March 2024, the carrying amount of the machinery was ₹9,63,000, with accumulated depreciation amounting to ₹1,07,000.

Questions to test your ability

Q: While calculating total cost for an asset what can be included?

1. Purchase price and office supplies
2. Purchase price, import duties, non-refundable taxes, transport, and installation costs
3. Purchase price, employee salaries, and office rent
4. Purchase price, refundable taxes, and marketing expenses

Q: Which document do you NOT need when recording an asset purchase?

1. Purchase invoice
2. Transport receipts
3. Installation bills
4. Employee payroll slips

Q: Describe how taxes and duties are recorded for the purchase of an asset ?

1. Mix them with the total asset cost
2. Track them separately from the asset cost
3. Only if they’re refundable
4. As part of the depreciation

Q: Why it is advised to maintain register for fixed asset ?

1. Track employee performance
2. Monitor office supplies
3. Keep tabs on asset buys, disposals, and depreciation
4. Record unrelated financial transactions

Q: From the following, which option tells about what can be disclosed in financial statements as per the guidelines of Ind AS 16?

1. Employee benefits
2. Marketing strategies
3. Original asset cost, total depreciation, and expected revenue contribution
4. Future investment plans

Conclusion

It is important to write down asset acquisitions into your books as it leads to solve lot of troubles. Following the suggested steps, keeping records in detail and regular reviews will helps you in effective decision making.