As your business evolves, you’ll likely acquire fixed assets that help you scale up and generate more revenue. Knowing how to properly manage these fixed assets is crucial for your financial statements and for effectively managing your business’s day-to-day cash flow and profitability. Today, we’ll explain everything you need to know about fixed assets and how to get started with a few fixed assets accounting methods.
What are fixed assets?
Fixed assets, also known as capital assets, are your business’s tangible assets—for example, property, plant, and equipment (PP&E). These assets and property can’t be easily converted into cash. By using the word “fixed,” you indicate that these assets won’t be sold in the current accounting year.
Pretty much all businesses have some fixed assets. For example, a small business may own these types of fixed assets:
- Real estate
- Computer equipment
- A car
- Office equipment
Why are fixed assets important?
Fixed assets represent an important capital investment. They’re vital for businesses for a number of reasons:
Fixed assets increase the business valuation
Costs associated with the value of fixed assets increase the valuation of the company. Company valuations are essential for other businesses evaluating companies during acquisitions and mergers.
Fixed assets can help generate revenue
Businesses that require infrastructure or equipment to produce goods or services will be able to generate more revenue and increase their profitability.
Selling fixed assets can help boost cash flow
If businesses run into debt or simply have poor cash flow, they can sell their fixed assets to get some liquid cash in hand.
What’s the difference between fixed assets and inventory?
Fixed assets are assets that aren’t meant to be sold in the immediate future. Inventory, on the other hand, is the stock of goods that a business has. These goods are meant to be sold in the immediate future for profit. For example, if a company buys computers for their employees to use, these are fixed assets. If a company buys computers to sell, they would be considered inventory.
What is fixed assets accounting?
Fixed assets accounting recognizes that all financial activities are linked to fixed assets. The accounting deals with the lifecycle of an asset, including purchase, depreciation, audits, revaluation, impairment, and disposal. From a bookkeeping perspective, each asset has an account where all financial activities related to it are properly recorded.
Fixed assets accounting is about determining what asset costs can be capitalized and what needs to be expensed when the asset goes into service.
Benefits of fixed assets accounting
Fixed assets accounting can provide your business with a few key advantages, including:
Businesses are always looking for ways to cut operative costs and make their tasks more productive. With the help of software, businesses have full control over the assets they have now and can make informed choices about future assets.
Creating customized loss prevention
Effective and regular asset accounting means you know the true value of your fixed assets, helping prevent losses.
Increasing business valuation
Successful fixed assets accounting should result in better fixed assets acquisitions, which will increase your business valuation. This is important in case you want to sell your business, either now or in the future.
5 tips for accurate fixed assets accounting
Now that you know a little bit about fixed assets accounting, what’s the best way to get started? By following these tips, you’ll be able to set up a methodical fixed assets accounting system that works for your business.
1. Learn the basics of fixed assets accounting
Fixed assets accounting is knowing how to account for investments while understanding what counts as a capitalized cost.
Ultimately, capitalized costs of assets depreciate over time with use. Fixed assets accounting is about telling the difference between what costs can be capitalized and what should be expensed the moment the asset goes into service.
Businesses must follow accounting standards and regulations to ensure the standardization of financial statements. These processes include creating financial records, calculating revenue, adhering to tax legislation, and making fixed assets valuations. Businesses paying taxes in the United States must follow Generally Accepted Accounting Procedures (GAAP).
2. Define your fixed assets
Fixed assets are assets your business doesn’t intend to sell in the short term. They could be equipment your business needs to function, property, company cars, and technology.
First, you need to build an asset register of all the fixed assets your business owns or reassess an existing register of your tangible assets. After that, create a hierarchy of assets, starting by listing your most valuable assets and making your way through less valuable assets.
3. Develop an asset management strategy
Once you know what fixed assets your business currently owns, you need to develop an asset management strategy.
First, define your asset management objectives. These could include:
- Maintaining adequate accounting records of asset acquisition, cost, description, and location within a business
- Keeping accurate depreciation records for depreciable assets
- Processing the acquisition of fixed assets in agreement with formal management procedures
Next, map out your asset lifecycles.
Properly mapping out your fixed assets will help you better manage them in the long run, since you’ll be able to quickly know which stage each asset is at.
Fixed assets generally have a lifecycle that comprises at least three of the following stages:
Purchase expenses include the total cost of an asset, including price and the cost to ship, install, or service the asset.
Depreciation is calculated to write off the cost minus the residual value of the asset over its expected useful life. Business owners need to do periodic depreciation calculations and record the decline in value for tangible assets and repayment for intangible assets. Using the straight-line depreciation method (the most common depreciation method), the estimated salvage value is taken off the cost of the asset, and the remaining amount is spread out over the asset’s useful lifespan.
These records reflect the current market value of a fixed asset. You need to make accounting changes if there’s an increase or loss in the valuation.
Known as “writing down,” this shows the time when the market value of an asset is less than the valuation entered on a business’s balance sheet.
After the useful life of the asset, a business might dispose of an asset by selling, trading, or discarding it. You should record a financial gain or loss on your records.
4. Establish asset management best practices
To keep your fixed assets accounts organized, it’s essential to establish some organization-wide asset management best practices.
Here are some key best practices to get started:
- Collect and store only useful information
- Develop a structure for naming and numbering assets
- Assess purchasing risks
- Create a regular depreciation schedule
- Employ asset impairment testing
- Dispose of assets effectively
5. Implement an automated asset management solution
Once you’ve defined your fixed assets and their lifecycle, it’s time to implement an asset management solution. Using cloud software can help you automate your asset management and make life easier for your finance team.
Within your automated asset management solution, you should be able to do the following:
- Automate reports and insights
Create customizable reports on fixed assets for any given time period. Reports should show asset purchases and sales throughout the year.
- Troubleshoot inaccuracies
Automated software can reduce human error and ensure there are no inaccuracies in your financial reports.
- Accurately calculate depreciation
Enter asset details and automatically calculate depreciation.
- Centralize asset data
Store all your fixed assets data in one central location.
Identifying your fixed assets and understanding their lifecycle is the first step to accurate asset management. Getting started might seem overwhelming, but consider it an investment in your company’s future growth. When you’re ready to streamline your financial reporting, including documenting your fixed assets, consider QuickBooks.
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