Accounting for Fixed Assets
Fixed assets encompass Land, Property, Building, Plant and Machinery, Equipment, Furniture and Fixtures, Vehicles etc. They are basically tangible assets owned by a business and are deployed for the production of goods and services or to be leased or rented to others. They could also be used for administrative purposes.
Whether a particular purchase can be classified as an asset or not largely depends on the nature of the business and its Capitalisation policy. The policy will determine the minimum value for capitalising the asset and the life expectancy of various fixed assets. In other words it is important to understand how long the fixed assets will continue to provide economic benefits to the organisation.
The word tangible denotes that fixed assets have physical existence and are not intangible like patents. Some assets which are intangible in nature are also classified as fixed assets like Goodwill and Intellectual Property. However a fixed asset does not mean that they are fixed at once place, they could be mobile for e.g. computer and hardware.
It must be noted that typically fixed assets cost much more than other assets, however their benefits accrue over a period of time. In other words, fixed assets are used for more than one accounting year. To illustrate the point, machinery purchased by an organisation process remains in use for a number of years to produce goods. Also fixed assets are not for resale purposes but purely for objectives stated above.
The balance sheet of a company typically shows the value of the fixed assets purchased and their value as on the date of the balance sheet. This is because fixed assets are subject to depreciation which is levied on fixed assets due to wear and tear. Depreciating a fixed asset has often been described as expensing it or in other words transferring it from the Balance Sheet to the Profit and Loss Account. The rate of depreciation varies from asset to asset and so does the method of depreciation.
Fixed assets are subject to impairments and maybe finally sold off. The accounting for all of the above has to take place based on prescribed guidelines.
FIXED ASSETS DEFINITION: - Fixed assets are those assets which are fixed in nature and they are long term tangible piece of the property that a company owns and uses in the production of income and is not expected to be converted into cash soon and not to be sold during the normal course of business. In shortly fixed assets are purchased for long term use and are not likely to be converted in to cash easily...
FIXED ASSETS ACCOUNTING POLICIES AND PROCEDURES: - The purpose of accounting policy is to ensure that University's fixed assets acquired, controlled and accounted in accordance with state regulations and auditors requirements. There are following accounting policies.
1. The procurement and purchasing of fixed assets shall be carried out in strict compliance with the University's policy.
2. It's University policy to ensure that all its fixed assets are managed in accordance with the current best practice such as fixed assets are safe by appropriate identification, recording, verification of existence and costs.
3. All assets with a value greater than Rs. 10,000 including VAT the University has developed a centrally maintained integrated Fixed Assets Register (FAR). For all assets less than Rs. 10,000 a local register must be maintained at departmental/research center.
4. Similarly managed the Ejection of fixed assets and come into university fixed assets by the third group and the provisions for the Governance of Irish Universities Code (2007) judge by the university.
5. All acquisitions of fixed assets require approval as set out in the Office Corporate and Legal Affairs.
6. In Line with University sector norms and Irish GAAP, all fixed assets greater than Rs. 10,000 including VAT are depreciated on straight line basis using the following estimated useful lives:
. Freehold Land Not depreciated
. Freehold Building 50 years
. Computer Equipment 3 years
. Equipment - other 5 years
. Motor Vehicles 5 years
7. Immovable assets like fixture and fittings which are permanently or solidly fixed to the physical structure of the building are to be capitalized and depreciated as part of the freehold building category. All other fixtures and fittings and all equipment items are to be depreciated over 5 years.
8. Related funding/grants will be write off the initial cost of an asset over a period in a similar manner.
PROCEDURES: - Following procedure for concluded the fixed asset recollection procedure:
1. RESOLVED BASE UNIT: Decide the base unit of the fixed asset and the determination is dependent on the unit of component, alike whether the functional viability of different parts of the fixed asset is seriously dissimilar, at which elevation you are in favor to spiritually traces the fixed asset and the cost-efficacy of prints fixed assets at different elevations of ingredient.
2. COMPILE COST: It is a piece of unit sustain to collect the base unit and take it to the form and situation deliberate for its work. This action may involve the acquire price, establishment of the base unit, or linked with management and practical actions. Assemble the gross price of the base unit.
3. EQUIVALENT TO INITIAL CAPITAL EDGE: Deciding whether the base unit entire value surpass the group or a large company capitalization ceiling. Whenever it does not, beside impose the paying out to overhead as sustain. In another way, start the following point.
4. ALLOCATE TO BENEFIT GRADE: There is a general ledger group in which allow the basic item to the almost suitable benefit grade such as office equipment, furniture and fittings or vehicles etc.
5. MAKE THE ENTRIES IN JOURNAL: For the suitable asset class debits the asset account in which we make a journal entry and expenses account will be credited in which we stored the original price of the basic items.
THE FIXED ASSETS RECORD CREATION PROCESS:
The accurate variety of statistics indicates for a fixed asset will differ from the line of work, that means the succeeding strategy may require being balanced. The next trial process is deliberated for the recording of a forge asset.
1. MAKING RECORDS: Making up to date data for the asset and allocate the upcoming sequential information figure to it. The computer software will allow the data number which has been tracked by a computer system. If it is not done by the computer system, then the accountant of fixed asset will do so.
2. NOTE AN EXPLANATION: Using the narration to explain the fixed asset in a single line. If an asset of our company is equivalent to another entity asset then u can operate the same explanation format. A part from that, examine apply the producer-provided explanation.
3. RECORD TAG DIGIT: Record "No Tag", if no tag was used by the company. And if company or entity giving any tag digit list then attach it to the equipment or product.
4. RECORD SERIAL NUMBER: Record the serial number on the product which is provided by the manufacturer. Enter "No Serial Number", If there is no serial number. Contact the producer to find out where it should be placed, if you cannot find the serial number.
5. RECORD ASSET POSITION: Record the position of the asset. Where manageable, state the position ideally by room and at least by building. If it is situated in the manufacturing area, in which it is situated identify the work center.
6. ALLOT RESPONSIBILITY: Declare the position title of the person or at least name of the person who is articulate for the asset.
7. REPORT THE PURCHASE DATE: Show the asset's month and year in which it was ready for the deliberate use and confirm it was used as of the actual date or not.
8. ENTER PRICE: Need to enter the total initial capitalized cost of the asset. The amount recorded in fixed asset journal or general ledger of an asset should match.
9. ALLOCATE TO AN ASSET CATEGORY: The characteristics of the allocated asset to an asset category is compared to the characteristics of the standard asset class which is used by an entity. Study the related assets to know in which classes they were set if you have any doubt. As the useful lives and the depreciation methods based on the asset category are assigned automatically, this is an important and required point.
10. STATE USEFUL LIFE: State the useful life, if the system doesn't assign the required life depends upon the asset book automatically.
11. ACCEPT DOCUMENTS: Keep the survey of the controller and accept the document. If the analyst noted any issue then he should correct it.
12. KEEP THE DATA: If the statistics are registered in a physical utterly network, keep it by asset group and then by a record number of the fixed asset record files.
FIXED ASSETS ACCOUNTING ENTRIES:
The fixed assets journal entries show the debit and credit account together with a brief narrative because of double entry book keeping. For a fuller explanation of journal entries, view some entries.
ACCOUNT DEBIT CREDIT
1. Fixed Assets A/C Dr. XXX
To Cash A/C XXX
(Being fixed assets Purchased)
2. Depreciation expense A/C Dr. XXX
To Accumulated depreciation XXX
(Being depreciation recorded)
3. Cash A/C Dr. XXX
Accumulated depreciation A/C Dr. XXX
To Fixed assets A/C XXX
To Gain on disposal A/C XXX
(Being gain on sale of asset)
4. Cash A/C Dr. XXX
Loss on Disposal A/C Dr. XXX
Accumulated depreciation A/C Dr. XXX
To Fixed Assets A/C XXX
(Being loss on sale of fixed assets)
5. Accumulated depreciation A/C Dr. XXX
To Fixed Assets A/C XXX
(Being remove a fully depreciated asset)
6. Accumulated depreciation A/C Dr. XXX
Loss on disposal A/C Dr. XXX
To Fixed assets A/C XXX
(Being Assets write off)
FIXED ASSETS EXAMPLES LIST:
The following are examples of fixed asset account
* Computer Equipment
* Computer Software
* Furniture and Fixtures
* Intangible Assets such as Patents
* Leasehold improvements
* Office Equipment
FIXED ASSETS DEPRECIATION:
Depreciation is moving the original cost of Fixed Assets from the Balance Sheet to the Profit and Loss Account and it is done by the Journal Entries. It is usually made once in a year by very small businesses.
Depreciation is charged by following two methods which are:
- Straight Line Method: In it annually depreciation is charged with fixed depreciation rate on Fixed Assets. Generally, this method is used for building.
- Reducing Balance Method: This method is used when the Fixed Assets will be losing its value annually. In it, depreciation is charged from reduced balance every year. Generally, this method is used for plant, machinery, furniture.
FIXED ASSET ACCOUNTING STANDARD:
AS 10 - ACCOUNTING FOR FIXED ASSETS
APPLICABILITY OF AS-10
AS 10 does not deal with for the following items:
- Plantation, forest and similar reproduction of natural resources.
- Wasting assets are included in mineral rights.
- Real State development expenses.
- Non-regenerative resources expenses.
- Expenses on the research and extrication of minerals, oils, natural gas etc.
Difficulties encountered in writing accounting for Fixed Assets assignment/assessments
The accounting of fixed assets would play a crucial role especially in manufacturing organisation or those which require heavy investments in fixed assets. A subject like accounting is very practical in nature and hence it is not surprising that professor's dole out a number of assignments to ensure that students perfect the game.
As a student of accounting, it is imperative for students to be clear in classifying assets as fixed or non-fixed assets. Further, the students need to be aware about the various transactions associated in the accounting of fixed assets such as depreciation, impairment, sale of assets etc. Typically the generally accepted accounting principles, or GAAP, form the basis of accounting long term assets or fixed assets in accounting. Students need to be well versed with the same as they are internationally recognised.
Students often find it complex to remember and understand what rate of depreciation is to be followed for which asset depending on the context of the business and also what method of depreciation is to be used.
Accurate accounting of the above transactions is very crucial to show a true and fair picture of the Company's financial position. If students go wrong here, they would not be basing their analysis correctly and hence such assignments require them to be very careful at each stage. Accounting is a technical subject and requires logical reasoning. It builds from chapter to chapter and it is important to remember to basics while solving advanced problems.
Finally accounting principles are subject to updating and amendments across the board and students find it difficult to keep abreast with the changes.
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