Fixed Assets Accounting: Complete Guide for Indian Businesses

The ₹50,000 Question

Rakesh bought a computer for ₹45,000 and paid ₹5,000 for software installation.

His accountant debated: “Should I capitalize ₹45,000 as asset and expense ₹5,000? Or capitalize ₹50,000?”

The answer matters because:

• Capitalize: Asset on balance sheet, depreciate over years
• Expense: Hit P&L immediately, reduce current year profit

The right treatment under accounting standards? Capitalize the full ₹50,000 because installation is necessary to make the asset usable.

Fixed assets accounting is full of such decisions. Get them right, and your financials tell the true story.

What are Fixed Assets?

Definition

Fixed Assets (Property, Plant and Equipment under Ind AS 16) are tangible items that:

• Are held for use in production, supply of goods/services, rental, or administration
• Are expected to be used for more than one accounting period

Characteristics

Types of Fixed Assets

Recognition Criteria

When to Capitalize

An item is capitalized as fixed asset when:

1. Probable future economic benefits will flow to the entity
2. Cost can be measured reliably

What to Include in Cost

Capitalization vs Expense

Threshold Policy

Many companies set capitalization thresholds:

Items below threshold: Expense immediately regardless of useful life.

Accounting Entries

Purchase of Fixed Asset

Bought machinery ₹5,00,000 + GST 18%

Machinery A/c                 Dr.  5,00,000
Input CGST A/c                Dr.    45,000
Input SGST A/c                Dr.    45,000
    To Creditor A/c                       5,90,000
(Being machinery purchased)

Capitalization of Incidental Costs

Paid ₹25,000 for installation of machinery

Machinery A/c                 Dr.    25,000
    To Bank A/c                            25,000
(Being installation costs capitalized)

Self-Constructed Asset

Factory building constructed with materials ₹20L, labor ₹5L, overheads ₹2L

Building Under Construction A/c Dr. 27,00,000
    To Raw Materials A/c                20,00,000
    To Wages Payable A/c                 5,00,000
    To Overheads A/c                     2,00,000
(Being construction costs accumulated)

When complete:
Building A/c                  Dr. 27,00,000
    To Building Under Construction A/c  27,00,000
(Being asset capitalized)

Depreciation Entry

Annual depreciation on machinery ₹50,000

Depreciation Expense A/c      Dr.    50,000
    To Accumulated Depreciation A/c        50,000
(Being depreciation for the year)

Sale of Fixed Asset

Sold machinery (Cost ₹5,00,000, Acc.Dep ₹3,00,000) for ₹2,50,000 + GST

Bank A/c                      Dr.  2,95,000
Accumulated Depreciation A/c  Dr.  3,00,000
    To Machinery A/c                      5,00,000
    To Output GST A/c                       45,000
    To Profit on Sale A/c                   50,000
(Being machinery sold at profit)

Impairment Entry

Machinery impaired by ₹1,00,000

Impairment Loss A/c           Dr.  1,00,000
    To Accumulated Impairment A/c        1,00,000
(Being impairment recognized)

Fixed Asset Register (FAR)

What is FAR?

A detailed record of all fixed assets owned by the company.

Essential Fields in FAR

Sample FAR Format

Depreciation

Methods

Depreciation Rates (Companies Act - Schedule II)

Component Accounting

For significant components with different useful lives:

Building ₹1 Crore:

Without component accounting: ₹1 Cr / 60 = ₹1.67 lakhs (understated)

Revaluation

When to Revalue

Revaluation Entries

Land originally ₹50 lakhs, revalued to ₹80 lakhs

Land A/c                      Dr. 30,00,000
    To Revaluation Reserve A/c          30,00,000
(Being land revalued)

If previously impaired and now reverting:

First reverse impairment through P&L, then create reserve.

Revaluation Frequency

• Must revalue entire class if revaluation model adopted
• Frequency depends on volatility (annually for volatile, 3-5 years otherwise)

Impairment

When to Test

Impairment Calculation

Recoverable Amount = Higher of (Fair Value - Costs to Sell, Value in Use)

Impairment Loss = Carrying Amount - Recoverable Amount (if carrying > recoverable)

Impairment Entry

Machine carrying value ₹20 lakhs, recoverable value ₹15 lakhs

Impairment Loss A/c           Dr.  5,00,000
    To Accumulated Impairment A/c         5,00,000
(Being impairment recognized)

Asset Disposal

Methods of Disposal

Disposal Calculation

Gain/(Loss) on Disposal = Sale Proceeds - (Cost - Accumulated Depreciation)
                        = Sale Proceeds - Net Book Value

Entries

Sale at Profit:

Bank A/c                      Dr.  Amount received
Accumulated Depreciation A/c  Dr.  Total depreciation
    To Asset A/c                          Original cost
    To Profit on Sale A/c                 Gain amount

Sale at Loss:

Bank A/c                      Dr.  Amount received
Accumulated Depreciation A/c  Dr.  Total depreciation
Loss on Sale A/c              Dr.  Loss amount
    To Asset A/c                          Original cost

Scrapping (no proceeds):

Accumulated Depreciation A/c  Dr.  Total depreciation
Loss on Write-off A/c         Dr.  Remaining NBV
    To Asset A/c                          Original cost

GST on Disposal

Capital Work in Progress (CWIP)

What is CWIP?

Assets under construction not yet ready for use.

CWIP Accounting

1. Accumulate all costs in CWIP
2. Transfer to asset account when ready for use
3. Start depreciation from date ready for intended use

CWIP Entries

Phase 1: Construction:

CWIP - Building A/c           Dr. 50,00,000
    To Contractor A/c                    40,00,000
    To Architect Fees A/c                 5,00,000
    To Bank A/c                           5,00,000
(Being construction costs accumulated)

Phase 2: Transfer to Asset:

Building A/c                  Dr. 50,00,000
    To CWIP - Building A/c              50,00,000
(Being building capitalized upon completion)

Interest Capitalization (Ind AS 23)

Borrowing costs on qualifying assets must be capitalized:

CWIP A/c                      Dr.  5,00,000
    To Interest Expense A/c              5,00,000
(Being borrowing cost capitalized)

Physical Verification

Purpose

• Verify asset existence
• Check asset condition
• Update FAR details
• Identify disposals/losses

Frequency

Physical Verification Process

1. Print FAR listing
2. Visit each location
3. Match physical asset to FAR
4. Update location/condition
5. Tag untagged assets
6. List missing assets
7. Prepare reconciliation report
8. Write-off missing assets (with approval)

Reconciliation Format

Disclosure Requirements

As per Schedule III (Companies Act)

Ind AS 16 Disclosures

Tax Considerations

Income Tax Depreciation

• Block of Assets: Group by depreciation rate
• Method: WDV only
• Rates: 5% to 40% depending on asset type
• Additional Depreciation: 20% for new plant & machinery in manufacturing

GST Considerations

Blocked ITC Assets

Internal Controls

Key Controls

Audit Trail

Common Mistakes

Mistake 1: Wrong Capitalization

Error: Expensing items that should be capitalized (or vice versa) Impact: Misstated profit Solution: Clear capitalization policy

Mistake 2: Wrong Useful Life

Error: Using standard lives without considering actual usage Impact: Wrong depreciation Solution: Asset-specific assessment

Mistake 3: Missing Component Accounting

Error: Treating entire asset as one component Impact: Understated depreciation Solution: Identify significant components

Mistake 4: No Physical Verification

Error: Relying only on FAR without physical check Impact: Ghost assets, losses undetected Solution: Annual verification

Mistake 5: Delayed Disposal Accounting

Error: Asset disposed but not removed from books Impact: Overstated assets Solution: Timely disposal entries

Disclaimer

This guide is for educational purposes. Fixed assets accounting should follow applicable accounting standards (Ind AS/IGAAP) and Companies Act requirements. Consult a qualified Chartered Accountant for specific situations.

Summary

Fixed assets accounting essentials:

1. Recognition: Cost includes all costs to make asset ready for use
2. Depreciation: Systematic allocation over useful life
3. FAR: Detailed record of all assets
4. Verification: Physical check annually
5. Disposal: Proper gain/loss calculation
6. Compliance: Companies Act + Income Tax requirements

Remember: Fixed assets are often the largest assets on the balance sheet. Get the accounting right.

Social Media Posts

LinkedIn: “Bought a ₹45,000 computer. Paid ₹5,000 for installation.

What to capitalize?

❌ ₹45,000 (and expense ₹5,000) ✅ ₹50,000 (total cost to make it usable)

Fixed asset cost includes: • Purchase price • Installation costs • Site preparation • Professional fees • Testing costs

But excludes: • Training costs • General overheads • Admin expenses

Every decision impacts profit (expense vs depreciation).

Know your standards. Apply them right.

#FixedAssets #AccountingStandards #IndAS16”

Twitter/X: “Fixed Asset Capitalization Checklist:

✅ Purchase price ✅ Import duties ✅ Installation costs ✅ Site preparation ✅ Professional fees ✅ Testing costs

❌ Training ❌ General overheads ❌ Admin costs ❌ Recoverable GST

#AccountingBasics”

Instagram: “Why do accountants argue about ₹5,000? 🤔

The question: Is it an ASSET or EXPENSE?

IF ASSET: 📊 On balance sheet 📉 Depreciate over years 💰 Higher profit this year

IF EXPENSE: 📊 Not on balance sheet 📉 Hit P&L immediately 💰 Lower profit this year

RULES: ✅ Benefits > 1 year = Consider capitalizing ✅ Above threshold = Capitalize ✅ Regular maintenance = Expense

Same ₹5,000. Different treatment. Different profit.

That’s why accountants care! 📚

#FixedAssets #AccountingTips”