Describe fixed asset management
Fixed assets and current assets
In a company's balance sheet, assets are divided into two groups:
Current assets
Fixed assets
It's important to define the differences between current and fixed assets before discussing how to account for each. The classification of assets isn't based on the physical nature of the asset, but rather on the purpose of the asset ownership.
Current assets are assets that a company expects to convert to cash or use up within one year or one operating cycle, whichever is longer.
Examples of current assets include:
Cash
Accounts receivable
Prepaid expenses
Inventory
Fixed assets are assets that a company owns and uses in the daily operations of the company and aren't intended for resale to customers. The useful lives of these assets span multiple years.
Examples of fixed assets include:
Vehicles
Computers
Machinery
Buildings
Copyrights and trademarks, often referred to as intangible assets.
Based on these definitions, an asset could be categorized as a fixed asset in one company and as a current asset or inventory item in another.
An example of a company where the same asset might be classified as both fixed and current is an automobile dealership. The vehicles held for sale are inventory items in addition to current assets, whereas an employee's company car is a fixed asset.
Accounting for fixed assets
When fixed assets are acquired, they are treated as balance sheet transactions and recorded as assets on the balance sheet.
Fixed assets represent permanent value and not just expenditures in the year of acquisition. Usually, they are depreciated or expensed over their useful life. Other adjustments might also be necessary. The most common transaction, known as depreciation, is an entry that expenses the part of the asset's original purchase price that was used during the year.
Various methods are used for depreciation. One method, called straight-line depreciation, calculates the depreciation by dividing the acquisition costs by the expected service life of the asset. The rules that determine the calculation of depreciation are defined in local legislation.
For all assets, the value of the asset in the balance sheet (net book value) should be reviewed at least once each year. You can do this monthly, quarterly, semi-annually, or annually. Together with this value review, an adjustment of the asset value in the balance sheet (write-down or write-up) might be necessary.
Extraordinary market occurrences that would impact the asset’s price if the company were to reacquire it typically cause write-down or write-up amounts. For example, the real estate market might cause the increased price of a building. Accounting principles in some countries or regions prohibit asset write-up.
When a company determines that an asset is no longer useful—whether due to sale or scrapping—it must be written off and removed from the accounting books. Therefore, the original acquisition price and accumulated depreciation of the asset are reversed, and any surplus or loss from the disposal is posted to the profit and loss statement.
Relationships between fixed assets components
The following diagram illustrates the relationships of the Fixed assets module in Finance.
Fixed asset groups let you group your assets and specify default attributes for every asset assigned to a group.
Books are assigned to fixed asset groups. Books track the financial value of a fixed asset over time by using the depreciation configuration defined in the depreciation profile.
You should first set up depreciation profiles. In the depreciation profile, you can configure how the value of an asset is depreciated over time. You need to define the method of depreciation, the depreciation year (calendar year or fiscal year), and the frequency of depreciation.
After you set up books, you can create the posting profile. The posting profile must be defined by book, but it can also be defined at a more detailed level. For example, you can define the posting profile for the combination of a book and a fixed asset group, or even for an individual fixed asset book. By default, the ledger accounts that are defined are used for your fixed asset transactions.
You must define the posting profile by book, but you can also define it at a more detailed level. In the Groupings field, you can define Group. Then you can select a fixed asset group in the Account relation field. In the Groupings field, you can define Table and then select a fixed asset in the Account relation field. You can configure the posting profile based on fixed asset book, fixed asset group, or fixed asset.
Like acquisition, you can define separate posting profiles for all fixed asset transactions like:
Acquisition
Acquisition adjustment
Depreciation
Depreciation adjustment
Revaluation
Write up adjustment
Write down adjustment
Disposal – Sale
Disposal – Scrap
Provision for reserve
Transfer for reserve
Extraordinary depreciation
Special depreciation allowance
You can post journals for these fixed asset transaction types. To create a journal, you need to navigate to the Fixed assets module > Journal entries > Fixed asset journal page.
In the Transaction type field, you can select the transaction types for which the fixed asset journal needs to be posted.
In the following example, you create a new fixed asset and post an acquisition journal.
In the USMF company, navigate to the Fixed assets > Fixed assets > Fixed assets page.
Select the New button in the action pane.
In the Fixed asset group field, select MACH.
In the Name field, enter Laptop.
Save the record.
In the USMF company, navigate to the Fixed assets > Journal entries > Fixed assets journal page.
Create a new journal by selecting the New button in the action pane.
In the Name field, select FACur.
Select the Lines button in the action pane.
In the Date field, select the current date.
In the Transaction type field, select Acquisition.
In the Account field, select the newly created fixed asset.
In the Book field, select CONSUM.
In the Debit field, enter 1000.
Post the journal by selecting the Post button in the action pane.
Navigate back to the newly created fixed asset.
Select the Valuation button in the action pane.
In the Acquisition and Net book value fields, notice that 1000 is added.