What is fixed asset accounting?

What is a fixed asset?

A fixed asset is a physical entity which is used by the business and that has a monetary value. Each fixed asset is not something that will be used up (such as stock or raw materials) or sold within the next year (hence why the asset is termed ‘fixed’).

Most businesses have at least some fixed assets:

• Tangible assets (e.g., buildings, land, and computer equipment)
• Intangible assets (e.g., intellectual property such as copyrights and patents)
• Other types of long-term investments

Fixed assets include both physical and non-physical assets necessary to keep the business functioning in the long run.

Fixed assets are accounted for on the company Balance Sheet and are usually referred to as plant, property and equipment (PP&E).

The value of the majority of fixed assets tends to go down over time as they are utilised and therefore subject to wear and tear. Assets also get older and become outdated which can affect their value. Any change in value needs to be reflected in how each fixed asset is listed in the company accounts.

In other words, fixed asset accounting involves managing and recording the financial aspects of you long-term or 'fixed' assets. It enables you to measure the impact on your cash flow statement and how these assets further contribute to helping your business generate revenue.

Types of fixed assets

The various types of fixed assets used in accounting usually fit into one of three categories.

• Plant usually refers to industrial machinery as well as vehicles such as HGVs and vans.
• Property refers to buildings and land (such as the car park) owned by the business.
• Equipment includes everything from computers and furniture to tools or fixtures and fittings.

All three types of fixed assets should be accounted for. Check out the examples of each type of fixed asset in our article What is a fixed asset register?

Bear in mind too that fixed assets don’t include raw materials, supplies or finished products as these are part of the inventory which is logged separately. The key difference is that these are items that will be used relatively quickly rather than ‘fixed’ or held within the business for use over the longer term.

Characteristics of fixed assets

To determine what should be included in your fixed asset register, look for assets that meet the following criteria:

• The asset has a useful life of at least a year so is likely to be retained within the business
• The asset is depreciating in value over time as it is used by the business
• The asset is illiquid i.e. it has a value which is not easily converted into cash

What is the fixed asset accounting cycle?

The Finance team is responsible for keeping up-to-date records of the various fixed assets across the business as well as their value. The fixed asset accounting process reflects the fact that those values can change as the assets progress through their useful lifecycle.

Here's the four key stages of the fixed asset accounting cycle:

1. Acquisition: At the point of purchase, a new fixed asset is added into the accounts.
2. Depreciation: The value goes down as it ages over time and is recalculated accordingly.
3. Revaluation: Some fixed assets are reassessed against fluctuating market value.
4. Disposal: At the end of its lifecycle the asset is sold or scrapped and either a gain or a loss needs to be recorded in the accounts.

Not every stage is relevant for every fixed asset - so for example, depreciation doesn’t usually apply to land. Similarly, some fixed assets are more likely to need revaluation – vehicles are a good example. Be aware too that revaluation can also mean the value goes up as well as down.

For a your organisation's financial well-being, it's essential to calculate depreciation and determine the reduction of your fixed assets over time.

To do so, Finance professionals employ methods such as units of production or sum of the years digits. Your Finance team may also keep track of the depreciation expense in your company's financial statements.

Some dos and don'ts for fixed asset accounting

1. Try applying the ’12 month or more usefulness’ factor to determine which assets can be included in your fixed asset accounting.
2. With a significant number of fixed assets to account for, it makes sense to put in place a way of tagging or tracking individual assets to make it easier to manage. Consider using QR codes, bar codes, serial numbers or other means of scanning individual assets.
3. Some circumstances or events can change the value of specific fixed assets, so do make sure that calculations and valuations are revised and updated when necessary.
4. Don’t forget to include insurance details and other useful information such as specific location and maintenance requirements in your fixed asset accounting register.
5. Consider the whole life value of individual assets, not just the service life for your organisation.
   
   

How to simplify your fixed asset accounting cycle

One of the most effective ways to simplify your fixed asset accounting cycle and processes, as well as building in greater accuracy and consistency in your records, is to make use of software tools specifically designed to ease the process.

The fixed asset software feature within Access Financials is a good example of how to utilise technology to make the process much easier for the Finance team.

Explore our fixed asset accounting software online or book a demo to see the software live in action.

If you have any questions about the software, feel free to put your question in the live chat on this page and one of our finance experts will respond quickly.

How fixed asset accounting software helped Anthology

Anthology have used Access Finance and Accounting software since their second year of operation, and the product suite has helped them to improve the efficiency of their financial processes and support their growing operations with the simple scalability of the solutions.

Since implementation, Access Finance and Accounting software has helped Roz Johnson, Group Financial Accountant at Anthology, to make her job easier and more efficient. By automating inputting processes, and storing all information in a single space, Access finance software has improved the visibility and accessibility of Anthology’s data. This also means that Anthology’s reporting processes are easier and more dynamic. Roz can react swiftly to any enquiries they have regarding their data, creating tailored reports quickly and accurately.

Read the full case study.