Assets, Depreciation & Intangibles: Types, Valuation & Amortization

Core Concepts: What Are Assets?

Assets are economic resources owned by a business that provide future benefits. They appear on the left side of the Balance Sheet and are classified into:

1. Classification of Assets

classDiagram
    class Asset {
        <<abstract>>
        +Future Economic Benefit
    }
    class TangibleAsset {
        +Physical Existence
        +Depreciation
        +Examples: Land, Building, Machinery
    }
    class IntangibleAsset {
        +No Physical Form
        +Amortization
        +Examples: Goodwill, Patents, Trademarks
    }
    class CurrentAsset {
        +Convertible to Cash <1 Year
        +Examples: Inventory, Accounts Receivable
    }
    class NonCurrentAsset {
        +Long-Term Use (>1 Year)
        +Examples: Plant, Property, Equipment
    }
    Asset <|-- TangibleAsset
    Asset <|-- IntangibleAsset
    Asset <|-- CurrentAsset
    Asset <|-- NonCurrentAsset

Key Definitions:

• Tangible Assets: Physical assets like machinery, buildings, or vehicles. Depreciate over time.
• Intangible Assets: Non-physical assets like patents, trademarks, or goodwill. Amortized over their useful life.
• Current Assets: Convertible to cash within 12 months (e.g., inventory, accounts receivable).
• Non-Current Assets: Used for long-term operations (e.g., land, machinery).

Depreciation: Why and How?

Depreciation allocates the cost of a tangible asset over its useful life. It is a non-cash expense that reduces the asset’s book value.

Why Depreciate?

1. Matching Principle: Expense recognition matches revenue generation.
2. Tax Benefits: Reduces taxable income.
3. Accurate Financial Reporting: Reflects asset wear-and-tear.

Depreciation Methods

Worked Example: Depreciation for a Nepali Business

Scenario: Kathmandu Retail Shop buys a delivery van for Rs 2,500,000 on Baisakh 1, 2079. Expected life: 5 years, salvage value: Rs 500,000.

1. Straight-Line Depreciation

Journal Entry (Year 1):

2079 Baisakh 1
Van A/c                     Dr. 2,500,000
   To Bank A/c                     2,500,000
(Van purchased on credit)

2079 Baisakh 31
Depreciation Expense A/c     Dr. 400,000
   To Van Depreciation A/c       400,000
(Depreciation for the year)

2. Written Down Value (WDV) at 20%

Intangible Assets: Amortization & Goodwill

Intangible assets lack physical form but provide long-term value. Examples:

• Patents (legal protection for inventions)
• Trademarks (brand identity, e.g., Nepal Telecom’s “Ncell” logo)
• Goodwill (excess paid over fair value in acquisitions)

Amortization Example: Patent Purchase

Scenario: Nepal Pharmaceuticals buys a patent for Rs 1,000,000 with a 10-year life.

Journal Entry:

2079 Baisakh 1
Patent A/c                     Dr. 1,000,000
   To Bank A/c                     1,000,000
(Purchase of patent)

2079 Baisakh 31
Amortization Expense A/c         Dr. 100,000
   To Patent A/c                   100,000
(Amortization for the year)

Impairment of Assets

If an asset’s book value > recoverable amount, it is impaired. Steps:

1. Test for Impairment: Compare carrying amount with fair value less costs to sell.
2. Recognize Loss: Debit Impairment Loss A/c, credit Asset A/c.

Example: Daraz Nepal’s warehouse is worth Rs 80,000,000 but has a recoverable amount of Rs 60,000,000.

Journal Entry:
Impairment Loss A/c              Dr. 20,000,000
   To Warehouse A/c               20,000,000
(Impairment loss recognized)

In the Real World

1. Ncell (Nepal Telecom):

   • Depreciation: Ncell’s base stations (costing millions) are depreciated over 5–10 years using Straight-Line Method to reflect wear-and-tear in financial statements.
   • Intangible Assets: The Ncell brand (trademark) is amortized over 10–20 years to spread its value across reporting periods.

2. Daraz Nepal:

   • Inventory (Current Asset): Daraz’s warehouse stock is valued at lower of cost or net realizable value (NRV) to avoid overstatement.
   • Delivery Vans (Tangible Asset): Depreciated using WDV method (20% annually) because vans lose value faster in the first few years.

3. Khalti (Digital Payment System):

   • Software (Intangible Asset): Khalti’s payment gateway software is amortized over 3–5 years as it becomes obsolete quickly.
   • Servers (Tangible Asset): Physical servers depreciated using SYD method since they are used more intensively in early years.

Accounting Cycle: Assets in Financial Statements

flowchart TD
    A["Opening Trial Balance"] --> B["Record Asset Purchases"]
    B --> C["Calculate Depreciation/Amortization"]
    C --> D["Prepare Adjusted Trial Balance"]
    D --> E["Close Books: Post to Ledger"]
    E --> F["Prepare Financial Statements"]
    F --> G["Balance Sheet: Assets at Net Book Value"]
    F --> H["Income Statement: Depreciation/Amortization Expense"]
    G --> I["Closing Trial Balance"]

Example: Kathmandu Retail Shop’s Balance Sheet (Partial)

Exam Tip: How to Score Full Marks

1. Define Clearly:

   • "Depreciation is the systematic allocation of an asset’s cost over its useful life."
   • "Intangible assets are non-physical resources with future economic benefits."

2. Show Calculations:

   • Always label years in depreciation schedules (e.g., "2079: Rs X").
   • Use formulas and step-by-step working (e.g., SL = (Cost - Salvage)/Life).

3. Link to Real Businesses:

   • Example: "Ncell depreciates its towers using WDV because their value declines faster initially."
   • Example: "Daraz amortizes its e-commerce platform over 5 years as technology becomes obsolete."

4. Common Mistakes to Avoid:

   • ❌ Forgetting salvage value in SL method.
   • ❌ Mixing depreciation (tangible) with amortization (intangible).
   • ❌ Not adjusting accumulated depreciation in the Balance Sheet.

5. Practical Questions:

   • If asked to "pass journal entries for depreciation", always include:
     • Date, Particulars, Dr/Cr amounts, and Narration.
   • For "impairment", show the comparison of book value vs. recoverable amount.

Final Note: Master one numerical example per method (SL, WDV, SYD) and one intangible asset example. Examiners love real-world ties—mention Ncell, Daraz, or Khalti wherever possible!