Furniture and fittings are the number current that the company used for supporting its daily operation other than land, building, machinery, computer equipment, and other non-current. These noncurrent assets are recording in the company’s balance sheet at the end of the accounting period. It is valued at cost initially and subsequently value at cost less depreciation as well as impairment. This article will share how the Furniture and fittings are classified, measured, and reported in the balance sheet.
Furniture and fittings can be best described as the larger parts of the movable equipment used to furnish a particular location. It is classified as necessary items that are required to bring a certain location to a workable condition. Therefore, it is important to understand that furniture and fittings are classified as Non-Current Assets in the company’s Financial Statements. They are most not permanently affixed to a certain building. All the different items that are classified under furniture and fittings have a different useful life.
Furniture and Fittings are defined as Fixed Assets mainly because furniture and fittings tend to have the company for more than 12 months. Similarly, they are also expected to derive utility over a period of more than 12 months.
Hence, they are classified as Non-Current Assets. However, they are supposed to be depreciated over their useful life, depending on the rules and regulations that have been put forth by the relevant tax authority.
Examples of Furniture and Fittings include office furniture, fans, as well as lighting.
The recognition of Furniture and Fittings as Non-Current Assets is similar to recognizing and recording any non-current asset, for that matter. This means that there is a need to recognize furniture and fittings when they are procured, and the risk of ownership is transferred to the organization that is purchasing the goods and services.
This means that even if furniture and fittings are purchased on credit, they will still be recorded once the company receives the right to use them and is accountable for maintaining the particular piece of furniture and fittings.
Upon the recognition principle, the company must ensure that they have the legal right to use the particular items in their daily operations. Therefore, they are supposed to recognize this on their financial statements, regardless of the subsequent payment being deferred for the particular furniture and fittings.
The corresponding credit entry (after a debit to assets in the financial statements) would be creating a liability account to reflect the amount payable instead of the purchased furniture and fittings. Alternatively, if the purchase had been made in cash (and no credit was sought), the corresponding credit entry would have been credited to the bank (or cash) account.
Subsequently, it is important to record all these transactions at their carrying value after every respective year. Carrying value can be defined as the net between the asset’s cost and the carrying value of the respective asset. The assets are recorded at historical cost, and then accumulated depreciation is deducted every year to arrive at the correct carrying value of the respective asset. Hence, it is an important factor that needs to be considered to ensure that the users of the financial statements have a clear-cut idea regarding the asset’s actual value (since the historical cost is subject to change as a result of the product change).
Measurement of Furniture and Fittings
Furniture and Fittings are measured (and recorded) on the financial statements at their historical cost. This implies that companies are supposed to record all assets (including Furniture and Fittings) at their historical cost.
Historic cost refers to the cost that has been paid for the particular asset. Since the value of these tangible assets is unlikely to fluctuate, it is recorded at a cost price. Therefore, it is not impaired or changed from year to year. However, the carrying value of the particular asset is subject to a yearly depreciation charge that needs to be made every year.
Depreciation of Furniture and Fittings on the Balance Sheet is mostly undertaken according to the rules and regulations put forth by the respective accounting board. It is mostly carried out on a straight-line method since furniture and fittings are used evenly across their useful life. Therefore, they are supposed to be executed on an even basis over the course of their useful life.
The carrying value of this kind of asset is similar to the other assets in the class of non-current assets. At the end of each reporting date, the Furniture and Fittings carrying value is reduced by depreciation during the period and impairment.
Again, the same as other non current assets, the company need to assess the impairment of assets regularly.
Example of Depreciation of Furniture and Fittings
Factually, it can be seen that furniture and fittings are depreciated over their useful life. From the perspective of financial statements, depreciation tends to be a significant factor. This is primarily because accumulated depreciation is supposed to be mentioned in the financial statements. Similarly, the depreciation charge for the particular year is also supposed to be included as an expense for the current year in the Income Statement.
An example of how the depreciation of Furniture and Fittings is calculated (and subsequently recorded) is given in the following example:
Feliz Inc. has purchased new Furniture and Fittings for $30,000. It has a useful life of 10 years. The salvage value of $5000. What would be the depreciation charge for the current year? What would be the accumulated depreciation at the end of 3 years?
In the example above, it can be seen that the cost price of the given asset is $30,000. It has a useful life of 10 years, and hence depreciation per annum is going to be calculated as follows:
Depreciation per year = (Cost – Salvage value) / Useful life
Deprecation per year = ($30,000 – $5,000) /10 = $25,000/10 = $2500.
This means that depreciation for the current year amounts to $2500. Since this is a straight-line method of depreciation, it is important to realize that this depreciation charge will say the same over the course of all the years until the asset is used.
The accumulated depreciation is also going to increase by the same amount every year. This means that accumulated depreciation at the end of the 3rd year would amount to be $7500.
What happens when the Furniture and Fittings are sold?
Although fixed furniture and fittings might not always be sellable, they might be sold by the company in the case of furniture. In the case where the furniture is sold, it needs to be removed from the Balance Sheet. The amount is altogether removed from the Balance Sheet, the profit (or loss) incurred on the sale is credited (or debited)in the company’s income statement. This is further illustrated in the continuation of the example mentioned above:
Feliz Inc. decided to dispose of the furniture at the end of the 5th year. In this regard, they accepted an offer of $15,000 against the furniture that was purchased for $30,000. They decided to move forward with it.
It can be seen that at the end of the 5th year, the carrying value of furniture and fittings is calculated as following:
Accumulated Depreciation for 5 years = $2500*5 = $12,500
Carrying Value = $30,000 – $12,500 = $17,500
Profit (or Loss) on Sale = Selling Price – Carrying Value
Profit (Loss) = $15,000 – $17,500 = ($2500)
This implies that Feliz Inc. incurred a loss of $2500 as a result of the sale.
In order to record this, the following accounting treatment is required.
|Bank (Furniture Sold)||$15,000|
|Loss on Sale of Furniture||$2500|
Therefore, it can be seen that the carrying value is supposed to be written off from the Balance Sheet to record the subsequent amount from the financial statements. However, it must be noted that the historical cost and the carrying value of the asset must be removed, and the profit (or loss) made on the sale is not supposed to be reflected in the balance sheet.