Question

What are the characteristic of Long lived Assets/Plant Assets/Fixed Assets?
Why they need to be depreciated?

Answer 1

A long lived asset is an asset that is expected to remain in a business for more than one accounting period. Plant assets and fixed assets are also synonyms. So these assets are also acquired by the business enterprise for more than one accounting period and help for the purpose of generating some revenue. These assets are not sold in the ordinary course of business. As per IFRS these assets are are broadly known as property plant and equipment (PPE). Examples are Building, plant and machinery, furniture and fixture, vehicles etc

Characteristics of long lived assets / plant assets / fixed assets are -

1. They have some useful life assigned for which they are generating economic values to the company. And this life are more than one year.
2. These assets are are to be depreciated over its useful life.
3. These assets are used in the operations and have long term financial gain effect.
4. These assets are are non current in nature & hence cannot be easily converted into cash.
5. These assets form an important content of balance sheet and shown under the head non-current assets . They have a Debit balance.

Depreciation is an accounting method which ensures allocation of cost of asset over its useful life. Depreciation is charged due to matching concept. It allocate the cost of fixed asset to the cost of production and thus shows a better and true picture. It is a non cash expense which is charged to the profit and loss account and also gives the tax benefit. Since every year we charge depreciation to the profit and loss account but there is no cash outflow so the amount of depreciation will accumulate over a period of time until the assets useful life ended and then this amount to use to replace that assets.

Therefore, the asset is need to be depreciated so that the revenue generated can be matched with the the actual expense as well as for replacement of such asset over the end of useful life can easily be possible.

Charging of depreciation will also help in determining the carrying value of the fixed asset / plant asset. Determination of carrying value it necessary to show it on the balance sheet.

Carrying value is equal to cost of asset minus depreciation till date.

Under various tax laws and statue it is also mandatory to charge depreciation on fixed asset / plant asset / long lived assets.

The above are some of the reason due to which depreciation need to be charged or assets need to be depreciated.