How to Account for Fixed Assets?
Assets, which are owned by the company for producing goods or offering services to its clients, are known to be fixed assets. First thing that comes to mind h? These are classified as tangible, investment and the intangible. Non-physical assets like goodwill, patent and copyrights are known as intangible assets, whereas plants, building, land and equipment are called tangible assets. When accounting for fixed assets, their cost, functional life, depreciation, residual value and amortization needs to be taken into consideration.
Some main points must consider while looking for the answer of h?
1. For determining the appropriate cost of acquiring any fixed asset, you also need to add other expenses contributed straightway for its development. These include:
- Expenses incurred towards its delivery
- Expenses like stamp duty and import duties paid for its acquisition
- Cost of getting it installed
- Professional fees like that of an attorney or architect
2. Finding the practical life of fixed assets: All fixed assets have a practical life. It has a definite economic time over which its use is financially viable.
- Practical life means the time for which that asset would be fit for use. In due course of time any asset would get worsened or worn out. However, it may be possible to extend its life through adequate maintenance.
- Economic life means the time for which an asset can be expected to remain useful, including its repairs and maintenance. Generally, it’s shorter than its physical life. This is often referred to as average, effective or practical life.
3. Estimation of left-over value of any fixed asset
The left-over value of an asset is the value that can be recovered at the expiry of its practical life. If the estimated amount is negligible, it is assumed as zero.
4. Use of amortization or depreciation methods for distributing the amount of fixed assets
The reduction in the worth of tangible assets is called depreciation, whereas amortization is the reduction in the worth of an intangible asset over time.
- Straight-line method is most commonly followed for determining depreciation. This can be arrived at by deducting the expected residual worth from the price of its acquisition and dividing the figure by its practical life.
- Amortization can be calculated by dividing the price of a fixed asset by its practical life.
5. Incorporating the amounts of tangible and intangible fixed assets in the balance sheet under the head “fixed assets” or “non-current assets” at the end of an accounting period.
Balance sheets are created for a defined period of accounting. These may be prepared at every month end or end of each quarter or year.
I hope that answer of the question “h?” has been clarified.