Explore fixed asset management
Fixed assets and current assets
In a company's balance sheet, assets are divided into two groups:
It is important to define the differences between fixed and current assets before discussing how to account for each. The classification of assets is not based on the physical nature of the asset, but rather on the purpose of the asset ownership.
Current assets are those that a company depletes in the typical course of business over the next year or business cycle, whichever is shorter.
Examples of current assets include:
Fixed assets are assets that a company owns and uses in the daily operations of the company and are not intended for resale to customers. The useful lives of these assets span multiple years.
Examples of fixed assets include:
Copyrights or trademarks (a special class of assets frequently called intangible assets)
Based on these definitions, the same asset might be classified 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
All fixed assets are treated as balance sheet transactions in the year they are acquired, and they are posted as an asset to a balance sheet account.
Fixed assets represent permanent value and not just expenditures in the year of acquisition. They are typically depreciated, or expensed, over their useful life. Additional adjustments might also be necessary. The most common adjustment, 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 of the methods, straight line, is computed by taking the costs of the acquisition and dividing those costs by the expected service life of the asset. The rules that determine the calculation of depreciation are usually defined in the 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.
The write-down or write-up amounts are usually caused by some extraordinary occurrences in the market that affect the price if the company were to reacquire the asset. For example, the increased price of a building might be caused by the real estate market. Accounting principles in some countries or regions prohibit asset write-up.
When a company no longer has use for the asset, because it is either being sold or scrapped, the asset must be 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.