Introduction to Fixed Assets
Fixed assets or long term 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.
Costs Included in Fixed assets
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.
The typical costs to be included for different types of asset are summarized below.
Costs forming part of land assets typically include the following.
- Original purchases price
- Survey fees
- Legal fees
- Back property taxes
- Demolishing and removing buildings
- Clearing and grading of the land
Costs forming part of land improvements assets typically include the following.
- Paving and driveways
- Sprinkler systems
Costs forming part of buildings fixed assets typically include the following.
- Original purchase price
- Agents Commissions
- Sales and other taxes
- Building permits
- Materials, labor, and overhead costs
- Contractor costs
- Repairs and renovations
- Capitalized interest
- Architectural fees
Plant and Equipment
Costs forming part of plant and equipment fixed assets typically include the following.
- Original purchase price
- Sales and other taxes
- Transport costs
- Insurance in transit
- Installation costs
- Testing costs (prior to placing in service)
- Repairs (prior to placing in service)
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 under the heading non-current assets at capitalized cost less accumulated depreciation, referred to as book value, net book value or carrying value.
As it is based on the original cost of the asset, the carrying value will be different than the current market value of the asset.
For example, an asset purchased at 4,000 and depreciated at 20% per year on a straight line basis, will have a carrying value of 4,000 – 800 = 3,200 in the balance sheet at the end of year one. However, in reality, the asset may not actually depreciate and may in fact appreciate in value, and be worth say 4,100 at the end of the year. The value of 4,100 is referred to as the market value of the asset.
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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.