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Two people looking at a tablet computer, presumably assessing some fixed asset accounting

What is fixed asset accounting?

As your business continues to grow, you’ll need to track its growth of stock, sales, services, and process of production. It’s not enough to simply use manual spreadsheets for your team and accounting needs. You may have to update your stock control method which includes purchasing new software that your team can train and adapt to—this is where fixed asset accounting comes in.

What is a fixed asset?

To comprehend your accounting process, you must first understand what a fixed asset is and how it differs from other items in your warehouse. A fixed asset, also known as a capital asset, is a tangible piece of property, plant, or equipment (PP&E) that you own or manage with expectations that it’ll continuously help generate income. An asset is fixed when it’s an item that your business won’t consume, sell, or convert to cash within the next calendar year. Fixed assets are different than current assets, which are in cash or slated to be converted to cash within the next 12 months.

Fixed assets also differ from your stock, as stock is set to be consumed within a short timeframe. Stock can be divided into the following categories:

  • Raw materials

  • Finished goods for sale

  • Goods and services in progress

  • Operational, repair, and maintenance supplies

As your stock includes all your finished goods as well as the materials you’ll need to make them, fixed assets are what you’ll use to create, house, and ship those finished goods.


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Types of fixed asset

Businesses invest in a few types of fixed assets. Some examples are:

  • Buildings and facilities

  • Computer equipment and software

  • Furniture and fixtures

  • Machinery

  • Vehicles

Additional costs are usually involved when purchasing fixed assets. Subsidiary companies or third-party companies, serve as significant increases within your assets. For example, capitalised costs to purchase or develop software, as well as the conversion of older data, training, and maintenance must be factored into your overall costs.

Understanding fixed asset accounting

Fixed asset accounting is the precise recordkeeping of your business’s financial records about your capital assets. This details the lifecycle of an asset within five different stages. After your initial purchase, each fixed asset’s lifecycle includes at least three of the five stages below:

  1. Acquisition: A new fixed asset is entered into the books.

  2. Depreciation: Your asset periodically declines in value, calculated within a particular method.

  3. Revaluation: An assessment to record its current fair market value.

  4. Impairment: Also known as writing down, this serves as the recorded reduction in value due to events or circumstances.

  5. Disposal: Selling, scrapping, or another form of disposing an asset at the end of its service life.

Audits are also included in the detailed checks of your company’s accounting records after closing the books for the financial year. Whether internal or external, this is where you may notice inconsistencies or differences between your notes and the actual state of your assets. This also promotes transparency to your assets and accounting books if you’re losing more money than anticipated.

Methods of depreciation

Depreciation is an integral part of your accounting, showing how your fixed assets will depreciate in value as they get older. There are various methods used to calculate depreciation. The four most common methods are:

  • Double-declining balance: An accelerated depreciation in which the expense is greater the first few years and then smaller later, enabling you to use the equipment that may become obsolete with age.

  • Straight-line: An equal amount of depreciation applied every year.

  • Sum-of-the-years’ digits (SYD): This method lets you write off more in the earlier years and less in the later years through the calculation of the number of years.

  • Units of production: A yearly varying depreciation expense based on the output produced, allowing the business to match the actual output of depreciation expense it incurs.

There are different methods for yielding the best results depending on the type of asset and its lifetime. Choosing the right depreciation method is not the only thing that’ll determine how successful you’ll be at the end of the financial year.

Tips on bettering your fixed asset accounting

By understanding the basics of fixed asset accounting, there are a few things you can implement into your strategy to make sure you’re maximising your earnings.

  1. Establish a threshold for capitalisation. When first purchasing an item and your decision makers accurately determine a fixed amount for capitalisation, you ensure your accounting books are uniformly consistent and help you and your team immediately notice any accounting errors.

  2. Re-evaluating equipment life. Correctly estimating the length of time you’re able to use your fixed assets for their original purpose greatly helps your business in the long run. Since your accounting books and depreciation relies upon accurate life estimates, it’s important to re-evaluate when necessary as it may change over time.

  3. Tag your assets. It’s essential to track and tag your assets throughout their life as many different factors can affect their value. Tagging helps track your items throughout the stages of their lifecycles, as well as preventing theft, eliminating misplacement, and checking financial statistics.

  4. Automate insight with fixed asset accounting software. By automating your manual activities to help track your data with fixed asset accounting software, it’ll adds ease to your processes. Password protection also helps provide access only to those who need and are trained for it.

To have the best chance of keeping transparency throughout lifecycles, updating the necessary stakeholders on potential maintenance issues, and noting the state of your assets at any given time, it is crucial that your team has the right fixed asset accounting software in place.

Adding fixed asset accounting software to your business

As your business continues its growth, implementing intuitive software to add transparency to your accounting process is an important part of your future strategies. An all-in-one, cloud enterprise resource planning (ERP) solution serves as a turning point in your business’s success.

Dynamics 365 Business Central is a comprehensive business management solution that’ll help your team handle multiple operations and planning with ease. By connecting all of your financials, sales, services, and operations to a single streamlined business process, your team will be able to easily follow all customer interactions to, ultimately, make better business decisions.