Introduction to Fixed Assets
Fixed assets have a long life and are for use within the business and not held for resale. They are not part of the trading inventory, and are not involved in the day to day working capital cycle of the business so are not readily convertible into cash.
The amount recorded as a fixed asset is the capitalized cost which includes both the cost of the asset itself and the costs incurred in preparing the asset for its intended use, such as shipping, installation and testing costs.
The cost of the asset is the fair market value of the asset, usually the cash paid, or in the case of a part exchange of assets, the cash paid plus the fair market value of assets given in exchange.
Most assets have a limited life, the exception being land, and therefore depreciate over time. An estimate of this depreciation is shown as an expense in the income statement each accounting period.
Fixed assets include property, plant and equipment, and are shown in the balance sheet of the business at capitalized cost less accumulated depreciation, referred to as book value or net book value.
Fixed Asset or Expense?
If the item can be used for more than one year it should be treated as fixed assets and depreciated.
For practical reasons, it is normal to set a minimal cost below which the item is treated as an expense and charged to the profit and loss account in the year of purchase. For example, a stapler may have a life of more than one year but because of the minimal cost will be treated as an expense and not a fixed asset. The minimal amount will depend on the size of your business.
When recording fixed assets, the total cost of getting the asset in a place ready for use should be included. For example, the transport and freight costs of delivering the equipment to the factory, and the installation and set-up costs incurred in commissioning the equipment are part of the total fixed asset cost. Interest on debt used to finance the purchase of fixed assets and training costs for employees are not normally included as they are not a cost of getting the asset ready for use.
Small immaterial costs or costs which have no future benefit (such as repair costs), should not be included as part of the asset cost and are shown as expenses in the income statement as incurred.
Using a Fixed Assets Register
Fixed asset purchases are recorded in the fixed asset register. The register is usually subdivided into the various categories so that fixed assets are grouped together by nature, use or function.
Each asset should have it’s own record card, our free fixed asset register template will help you to establish a fixed asset register.
The grouping of fixed assets allows common depreciation policies to be applied. For example, computer equipment might be one grouping and the policy might be to depreciate all items in that group over 3 years.
The main details which need to be recorded in the register about the fixed assets are:
- Description of the fixed assets
- Unique reference number for the fixed assets
- Date of acquisition
- Original cost
- Depreciation charged on an annual basis
- Accumulated depreciation charge
- Net book value of the fixed assets
- Date of disposal
- Profit or loss on disposal of the fixed assets
- Details of financing of the fixed assets for example loans, leasing, hire purchase etc.