Bookkeeping / Accounting for Fixed Assets

Fixed assets are long-term assets that are used by a business to generate revenue, such as buildings, machinery, equipment, and vehicles. These assets have a useful life of more than one year and are not intended for sale. As a result, proper bookkeeping for fixed assets is critical to ensure accurate financial statements and tax reporting. In this blog post, we'll cover the basics of bookkeeping for fixed assets, including how to record fixed asset purchases, depreciation, and disposals. 

• Recording Fixed Asset Purchases (Creating a Fixed Asset Register): 

When a business purchases a fixed asset, it is important to record the transaction accurately in books. The purchase should be recorded as a debit to the fixed asset account and a credit to the cash or accounts payable account, depending on how the asset was paid for.  

Here's an example: 

ABC Company purchases a new machine for $10,000, paid for with cash. The journal entry to record the purchase would be: 

Debit - Machinery and Equipment $10,000 Credit - Cash $10,000 

It's important to note that not all expenses related to a fixed asset purchase should be included in the fixed asset account. For example, any installation costs, taxes, or shipping fees should be recorded separately in the appropriate expense account. 

• Depreciation of Fixed Assets  

Fixed assets are subject to depreciation, which is the process of allocating the cost of an asset over its useful life. Depreciation is important because it allows businesses to spread out the cost of an asset over several years, rather than recording it as a one-time expense in the year of purchase. 

There are several methods of depreciation, including straight-line, declining balance, and units-of-production. The straight-line method is the most commonly used, and it involves dividing the cost of the asset by its useful life to determine the annual depreciation expense. 

Here's an example: 

ABC Company purchases a new machine for $10,000, with an estimated useful life of 5 years and no salvage value. The annual depreciation expense using the straight-line method would be: 

$10,000 / 5 years = $2,000 per year 

The journal entry to record the annual depreciation expense would be: 

Debit - Depreciation Expense $2,000 Credit - Accumulated Depreciation $2,000 

Accumulated Depreciation is a contra-asset account, which means it reduces the value of the fixed asset on the balance sheet. 

• Disposing of Fixed Assets  

When a fixed asset is sold, scrapped, or otherwise disposed of, it is important to record the transaction accurately in books. The sale price or scrap value should be recorded as a credit to the fixed asset account, and any accumulated depreciation should be removed from the books.

Here's an example: 

ABC Company sells a machine for $5,000, which originally cost $10,000 and had accumulated depreciation of $6,000. The journal entry to record the sale would be: 

Debit - Cash $5,000 Debit - Accumulated Depreciation $6,000 Credit - Machinery and Equipment $10,000 

In this example, the net book value of the machine is $4,000 ($10,000 - $6,000), which means ABC Company incurred a loss of $1,000 on the sale. 

Conclusion  

Bookkeeping for fixed assets is critical to ensure accurate financial statements and tax reporting. By recording fixed asset purchases accurately, depreciating assets correctly, and disposing of assets properly, businesses can stay organized and maintain an accurate record of their assets.