Fixed Assets Accounting

2008-03-31 10:59:24

( Financial )



What are Assets?

Assets are your company's total resources, or items that you use to generate profits for your business. Corporate assets are made up of current and fixed assets. The difference of the two types lies in time, specifically, how long the assets stay in your company books.

Current and Fixed Assets

Current assets are short-term in nature, and are the most liquid assets. Items that are easily convertible into cash are part of current assets. These items include cash, bank accounts, short-term investments, receivables, and merchandise inventory.

On the other hand, fixed assets are more permanent and are meant for long-term use. Fixed assets may also be further subdivided into tangible or intangible. Tangible fixed occupy space and can be seen and touched, and include machinery, office equipment, tools, building, and vehicles. Intangible assets pertain to trademarks, patents and goodwill. These intangibles add to the value of your company's resources when you need to liquidate the business or transfer its ownership to another party.

Components of Fixed Assets Accounting

Your company's financial statements, mainly the balance sheet, has to show the correct figures for your fixed assets. You have to follow some generally accepted accounting principles when maintaining fixed assets accounting records.

Before you can record an acquisition of a fixed asset, you need to determine its exact value. The acquisition value is derived from the price of the asset plus any delivery costs, taxes or duties, and installation fees.

However, you must always assume that as you use the fixed asset for your business, the asset will decrease in useful life due to deterioration or obsolescence. The cost of depreciation represents this periodic decrease in useful life. The depreciation cost per period is based upon the acquisition cost divided by the number of useful years, and is shown on your balance sheet as a deduction against the asset's acquisition cost.

Importance of Proper Fixed Assets Accounting

The valuation of your company's fixed assets is crucial for determining the price at which you can sell or replace them. Buyers will want to know how you have recorded the assets in your books.

The net value after deducting depreciation is important in the event that you want to sell off the asset, or put it up as collateral for a loan. Lenders use the net value to calculate the loan to value ratio, which in turn serves as the basis for the amount of loan you can borrow against your asset.

You should hire a competent accountant to do proper fixed assets accounting. Better yet, you should take some courses in fixed assets accounting to ensure that you are following the right procedures.


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