All About Finances

A fixed asset is specially defined by accounting rules.  For an asset to be fixed (or by most worldwide accountancy standards count as “property, plant, and equipment”), it must be an asset purchased specifically for business use that may be difficult or impossible to quickly convert to cash.  It must be real and tangible (i.e. it cannot be a brand name or patent) and must be intended for use over a modest period of time, generally two or more years.  Common items that businesses classify as fixed assets include computer equipment, machinery, real estate, buildings, vehicles, office furniture, and fixtures.  Additionally, the useful life and future economic benefits of an asset must be predictable in order to qualify as a fixed asset.

Why use fixed asset accounting?

Companies that properly utilize fixed assets accounting receive a number of tax benefits, primarily in the form of depreciation, which can significantly reduce a firm’s total tax liability at the end of the business cycle.  Additionally, the use of fixed assets makes expense accounting very simple and predictable in the future.  By properly accounting for your assets, your company will save a great deal of money and headaches over the long run.

Determining the ‘cost’ of a fixed asset

The declarable depreciation of a fixed asset depends on its initial cost, so it is important to get this number right.  Including the price you pay for your fixed asset, you should also include delivery costs, installation costs (including time spent and labor), and an estimate for the labor and materials required to dismantle and sell or destroy the item at a later date.  It is not advised that you inflate you’re your accounting of the cost, but at least be aware that the cost of your fixed asset will usually be well in excess of its purchase price.

Determining depreciation expenses

Each company handles depreciation a little differently, but for the most part, standard accountancy dictates that you use a fixed depreciation schedule.  For example, the standard computer will be economically viable for three years before it will need to be replaced or significantly upgraded.  Because the life of a computer is relatively predictable, you are able to classify it as a fixed asset and depreciate it in a straight line—that is, each year, you will charge one third of the computer’s value as an expense.  This expense will count as a standard expense against your revenue, and the computer’s net asset value will decrease by the corresponding depreciation amount. Given the complexity involved in depreciating multiple items, fixed asset accounting software can be a valuable tool for larger business entities.

By treating these types of assets as fixed assets, you will be able to accurately and legally determine the value of your assets, have a very predictable and easy to determine expense schedule, and reduce your overall tax liability.  There are a number of guides and books that detail exactly how to account for every conceivable type of fixed asset.  While there are more advanced forms of fixed asset accounting, opting to use the simplest method is generally the best for small business owners or sole proprietors.

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