What is Fixed Asset Accounting?

To better understand how Fixed Asset Accounting works, let me take you through everything that entails/makes up a fixed asset, as it is a vital component of any successful organisation

A Fixed Asset is primarily a tangible product that you as a business or organisation already owns or is looking to own and manage in an attempt to build an income. This includes PPE which stands for Property, Plant and Equipment (not related to safety equipment.

A popular fixed asset you as an individual might already own would be your house, if you are providing it as a serviceable accommodation this would help you generate revenue. Even the objects within your house can be considered a fixed asset, this could be furniture, toilets, and even the bedrooms that go towards the maintenance and upkeep of your house.

Fixed Assets are usually never sold/consumed until the next ‘calendar’ year (a whole 12 months from January to the end of December) if the business wants some sort of liquidity and security if they cannot meet their financial obligations. 

Fixed assets also differ from your inventory, and this inventory can be divided into four primary categories:

  1. Raw materials

This is the raw components that go into the production of a product. For example, for furniture you would need wood.

  1. Finished Goods

These are the products/services available withing your inventory that are ready to be sold. For example you are a telecommunications provider in order for customers to access your service you would provide an additional product through a sim card to access the final service. 

  1. Goods & Services in Progress

These are goods/services still in the production process, which include all the raw materials, labour, and material used to make the product or service; this can also include the packaging that goes into making the goods/service. For Example, this can be something as simple as a barista making a coffee, the barista would be the labor, and the process of making the coffee would include grinding the bean, whisking the milk, and pressurizing the espresso shot to get the final product. 

  1. MRO (Maintenance, Repair & Operations Goods) 

Supply inventory that helps during the production process of the product and/or helps with the upkeep of a business. As your inventory includes all your finished goods as well as the materials you’ll need to make them, fixed assets are what you’ll use to create, house, and ship those finished goods.

The Balance Sheet

what is a Current Asset?

Current Asset
Stocks are considered as a Current Asset

A current asset is usually sold within the span of one calendar year, they appear on your organisation’s balance sheet as an annual financial statement.

A current asset can be stocks, securities just liquid assets, accounts receivable, inventory, and prepaid expenses. Fixed assets are depreciated, while current assets are not.

What is a Non-current Asset?

Manufacturing equipment is considered as a Non-current Asset

A non-current asset is usually an asset that has a considerable long term investment that you cannot liquidate within the calendar/financial year, as they are quite hard to liquidate due to their nature, this can be for example a house, manufacturing equipment and raw materials

Fixed assets are a form of noncurrent assets. Other noncurrent assets include long-term investments and intangibles. Intangible assets are fixed assets to be used over the long term, but they lack physical existence. 

As a general rule of thumb, audits are often included within your organisation’s accounting records after the fiscal year. Auditing helps you identify differences within these assets whether they be minimal or substantial and helps your organisation be more transparent (incredibly important for public companies who want to attract retail investors)

Capital Assets

Warehouses and trucks like these can be considered as Capital Assets

Fixed Asset Accounting is a method of keeping vital and incredibly detailed financial records through booking in terms of the capital assets of your organization/business.

A capital asset includes any sort of property held by your company, it can be tangible or intangible. Examples of this include the property, machinery (if you are manufacturer) and company vehicles you have, these assets are supposed to generate income over time (giving a room for rent, or as a manufacturer making enough products that the profits over time offset the cost of production and the cost of capital) 

Moreover, a capital asset has important characteristics such as 

  • The asset is useful for more than a year 
  • Acquiring the assets is more than the capitalisation amount
  • Not sold as a regular product
  • Cannot easily liquidate into cash (e.g. stocks are not capital assets)

Hopefully, this will help you understand and identify capital assets within your own organization. 

The Life Cycle of a Fixed Asset

Fixed Asset Lifecycle Diagram

Acquisition

The acquisition cost of the asset can be found through a variety of costs such as shipping, invoicing, installation, etc. These are any expenditures spent to prepare the asset for its intended use. However, things excluded can be cash discounts. 

To record the purchase of a fixed asset, debit the asset account and credit the cash account with the same amount.

Depreciation

Your asset periodically declines in value, calculated within a particular method.

Enter depreciation on the books for the entire asset pool or by asset type. The amount of accumulated depreciation is used to calculate any loss or gain on the asset’s disposal.

Depreciation can be classified into four types:

  1. Straight Line: This option evenly distributes depreciation over the useful life of an asset.
  2. Accelerated or Sum of Remaining Years: this method deducts a larger portion of the cost in the early years and a smaller portion in the later years.
  3. Depreciation by Units of Production: depreciation by units of production deducts an asset based on how much it produces.
  4. Double Declining Balance: this method accounts for the cost of a longer-lived asset that loses value quickly or becomes obsolete. Computer equipment, expensive cell phones, and other technology that has more value at the beginning of its life than at the end of its life are examples of assets that should use the double declining methods.

Revaluation

An assessment to record its current fair market value.

Impairment

Also known as writing down, this serves as the recorded reduction in value due to events or circumstances.

Disposition

Selling, scrapping, or another form of disposing an asset at the end of its service life.

Revaluation 

The revaluation of fixed assets aids in reflecting the fair market value of volatile assets or changes in an asset’s usefulness. Revaluation analysis describes the asset’s carrying value, or book value, or its value over its life.

Models 

Cost: Subtract the accumulated depreciation and any impairment costs from the original cost price in this model.

Revaluation: deduct the accumulated depreciation and impairment costs from the current fair market value.

Asset impairment is similar to advanced depreciation in that it reduces the potential benefit from an asset. When a significant change in circumstances occurs that may reduce a fixed asset’s gross future cash flow to an amount less than its carrying value, an impairment test should be performed.

Assignment and/or transfer dispositions can also be completed for accounting and tax purposes to obtain relief from any associated taxes or other liabilities. It can also refer to the sale of an asset used as collateral for a loan.

Disposition can occur in a variety of ways. The sale of stocks or bonds on the exchange market by an investor, for example, is referred to as the disposition of stocks. Insider trades are reported by a company as a disposition of shares to executives and the board of directors. The disposition of loan assets occurs when banks review loans and sell the collateral in the event of a borrower default. Donations to trusts or charities can also be referred to as a disposition 

Dispositions involving an assignment and/or transfer can also be completed for accounting and tax purposes in order to obtain relief from any associated taxes or liabilities. It may also refer to the sale of an asset used as collateral for a loan.

There are numerous ways for disposition to occur. The disposition of stocks, for example, refers to an investor’s sale of stocks or bonds in the exchange market. Insider trades are reported as a disposition of shares to executives and the board of directors by a company. The disposition of loan assets occurs when banks review loans and sell the collateral in the event of borrower default. Donations to trusts or charities may also be referred to.

So…

Fixed Asset Accounting is a vital and key bolt when building a successful organisation or even running one.

Instead of running it separately having it as part of your overall ERP system is great method of maintaining and locating your fixed assets, while giving you the capability of breaking down components of the asset, which can a relief when differing components within your asset change in value over time, helping you ensure that you can keep track of not just its location but also its value.