How would you account for a fixed asset that has deprciated to zero value?
Lathe a business buys, depreciates over the expected 5 year life of the asset, at the end it's value is zero and worth scrap value, but it is still in great working order and the company are going to keep on using it. Do you revalue it?
Sorry if this isn't so clear, it's early doors. This isn't an exam question, just something that i know has happened with fixed assets at my place of employment and i'm reet interested to know what happens.
My understanding Depreciation is designed to reflect the realisable value of a fixed asset. It doesn't mean that when the realisable value reaches zero you need to bin the asset. I have a client who has owned the same desk for 30 years, he would have to pay someone to take it away, but he still uses it and it's long since ceased to appear on his balance sheet. His filing cabinet is actually the same.
Thanks for the reply, but what happens if his desk becomes a collectors item and is then worth something? maybe he sells it, what happens to the money?
Cheers Kris, this is just a question i've been pondering for a while. So the table is still listed as an asset, it's just valued as zero then treated the same as any other asset upon disposal.
Does the lathe require any maintenance? Just a thought. That cost might outweigh or equal it's value. Would anyone buy it? If yes, then it should have a residual value.
I like a balance sheet to show a true snapshot of the assets and liabilities, but have been instructed not to bother in the past with premises and just show it as cost because a bank or loan company would do their own valuation. Also, with fluctuating prices, you'd be revaluing every year, and by the time anyone read the balance sheet it would have changed again.
The lathe and desk might be in a general pool, but if either became collectable then you could debit the asset account and credit capital. There's more to it for ltd co's but I've got someone coming in and need my hair cut, lol. It'll be in the text books under Revaluation reserve.
At the end of the day depreciation is just an estimate charge to allocate the net cost of the asset to the profit and loss account over the period which the asset will be generate income
Sometimes depreciation will be too high in which case you will have a gain on disposal, sometimes will be too low in which cas you will have a loss on disposal.
At the end of the day it comes out in the wash and the net cost will be eventually charged to the profit and loss account.
