W8 - DEPRECIATION & BAD DEBTS - DEPRECIATION BAD...

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1 DEPRECIATION & BAD DEBTS
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2 DEPRECIATION
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3 THE NATURE OF FIXED ASSETS Fixed assets are items not specifically bought for resale but to be used in the production or distribution of those goods normally sold by the business. They are durable goods that usually last for several years, and are normally kept by a business for more than one year. A fixed asset must also be expected to generate revenue over a number of future years, and be of a material amount. Referred to as capital expenditure. All other costs are revenue expenditure.
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4 The historical cost of fixed assets can include: legal expenses, extensions and improvements, as in the case of buildings, but not repairs and renewals; delivery charges and installation expenses, as in the case of plant and machinery. The historical cost of fixed assets must exclude: 1) the costs of any extended warranty, maintenance agreement and replacement/spare parts where these have been included in the invoice price of, for example, machinery or vehicles; 2) any road tax and fuel included in the invoice price of a vehicle.
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5 THE NATURE OF DEPRECIATION Depreciation is the allocation of the cost of a fixed asset over the accounting periods that comprise its useful economic life to the business according to some criterion regarding the amount which is ‘used up’ or ‘consumed’ in each of these periods. Depreciation is the permanent decrease in value of a fixed asset during a given accounting period. (Companies Act) Depreciation is a provision for the replacement of fixed assets.
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FURTHER KEY POINTS A provision for depreciation is the setting aside of income/funds, but not money/cash. FRS15 requires all tangible fixed assets except land and investment properties to be depreciated, even where their market value is greater than their historical cost or net book value. This includes buildings because they have a finite life. Fixed assets shown in the balance sheet at
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W8 - DEPRECIATION & BAD DEBTS - DEPRECIATION BAD...

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