Categories
Garden-Projects

How to account for fixed assets

A fixed asset is written off when it is determined that there is no further use for the asset, or if the asset is sold off or otherwise disposed of. A write off involves removing all traces of the fixed asset from the balance sheet, so that the related fixed asset account and accumulated depreciation account are reduced.

There are two scenarios under which a fixed asset may be written off. The first situation arises when you are eliminating a fixed asset without receiving any payment in return. This is a common situation when a fixed asset is being scrapped because it is obsolete or no longer in use, and there is no resale market for it. In this case, reverse any accumulated depreciation and reverse the original asset cost. If the asset is fully depreciated, that is the extent of the entry.

Example of How to Write Off a Fixed Asset

For example, ABC Corporation buys a machine for $100,000 and recognizes $10,000 of depreciation per year over the following ten years. At that time, the machine is not only fully depreciated, but also ready for the scrap heap. ABC gives away the machine for free and records the following entry.

Debit Credit
Accumulated depreciation 100,000
Machine asset 100,000

A variation on this first situation is to write off a fixed asset that has not yet been completely depreciated. In this situation, write off the remaining undepreciated amount of the asset to a loss account. To use the same example, ABC Corporation gives away the machine after eight years, when it has not yet depreciated $20,000 of the asset’s original $100,000 cost. In this case, ABC records the following entry:

Debit Credit
Loss on asset disposal 20,000
Accumulated depreciation 80,000
Machine asset 100,000

The second scenario arises when you sell an asset, so that you receive cash (or some other asset) in exchange for the fixed asset you are selling. Depending upon the price paid and the remaining amount of depreciation that has not yet been charged to expense, this can result in either a gain or a loss on sale of the asset.

For example, ABC Corporation still disposes of its $100,000 machine, but does so after seven years, and sells it for $35,000 in cash. In this case, it has already recorded $70,000 of depreciation expense. The entry is:

Debit Credit
Cash 35,000
Accumulated depreciation 70,000
Gain on asset disposal 5,000
Machine asset 100,000

What if ABC Corporation had sold the machine for $25,000 instead of $35,000? Then there would be a loss of $5,000 on the sale. The entry would be:

Debit Credit
Cash 25,000
Accumulated depreciation 70,000
Loss on asset disposal 5,000
Machine asset 100,000

Timing of Fixed Asset Write-Offs

A fixed asset write off transaction should only be recorded after written authorization concerning the targeted asset has been secured. This approval should come from the manager responsible for the asset, and sometimes also the chief financial officer.

Fixed asset write offs should be recorded as soon after the disposal of an asset as possible. Otherwise, the balance sheet will be overburdened with assets and accumulated depreciation that are no longer relevant. Also, if an asset is not written off, it is possible that depreciation will continue to be recognized, even though there is no asset remaining. To ensure a timely write off, include this step in the monthly closing procedure.

You can manage your fixed assets utilizing the fixed assets acts features in Dynamics NAV. Fixed assets acts allow you to release, track, and write-off the fixed assets of your organization.

The first step to managing your fixed assets is to set up fixed assets numbering and source codes.

To set up fixed asset numbering

  1. Choose the icon, enter Fixed Asset Setup, and then choose the related link.
  2. On the Numbering FastTab, select a number series for each type of fixed asset transaction.
  3. Choose the OK button to close the window and save your entries.

To set up fixed asset source codes

  1. Choose the icon, enter Source Code Setup, and then choose the related link.
  2. On the Fixed Assets FastTab, select a source code for each type of fixed asset.
  3. Choose the OK button to close the window and save your entries.

Releasing Fixed Assets into Service

An asset is recognized as a fixed asset after it is released into service for the organization. You can use the FA Release Act window to release fixed assets into service.

To release fixed assets into service

Choose the icon, enter FA Release Act, and then choose the related link.

On the General FastTab, fill in the fields as described in the following table.

On the Lines FastTab, fill in the fields as described in the following table.

Choose the OK button to post your entries and release the fixed assets into service.

Tracking the Movement of Fixed Assets

Tracking the location and status of fixed assets is an important function within most organizations. For example, you may want to record the movement of office equipment from a previous location to a new location. You can use the FA Movement Act window to track the movement of fixed assets and record the status of your fixed assets.

To track the movement of fixed assets

Choose the icon, enter FA Movement Act, and then choose the related link.

On the General FastTab, fill in the fields as described in the following table.

On the Lines FastTab, fill in the fields as described in the following table.

Choose the OK button to post your entries and record the movement of the fixed asset.

Writing Off the Value of a Fixed Asset

During the sale or disposal of a fixed asset, you may want to write-off the remaining book value of the asset that has not been depreciated. You can use the FA Writeoff Act window to write-off the remaining value of a fixed assets.

To write-off the value of a fixed asset

Choose the icon, enter FA Writeoff Act, and then choose the related link.

On the General FastTab, fill in the fields as described in the following table.

On the Lines FastTab, fill in the fields as described in the following table.

Choose the OK button to post your entries and record the write-off of the fixed asset.

No matter the size of your business, two requirements stay compulsory in every stage of your business’s life-cycle – first, accounting and second, tax/tax returns filing.

if you have a Chartered Accountant who takes care of both? As a business owner, you ought to know how your incomes/expenses, profits/losses show up in your accounting books and finally impact your taxability.

Finallly, we will bring you a series of articles that will tell you about how to account for various categories of account heads. In this article, we will discuss Fixed Assets in and out.

Try QuickBooks Invoicing & Accounting Software – 30 Days Free Trial

What is a Fixed Asset?

Fixed asset is an asset of a business held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

They can be categorized as:

  • Vehicle: This will include the car you use for business purposes provided it is registered in the business’s name or the name of the founder(s).
  • Furniture & Fixtures: This will include the desks, chairs, workstations and the other fittings in your office work station.
  • Computer Equipment: As the name suggests, this will include the desktops, laptops, routers, dongles and data-storage devices used for business purposes.
  • Office Equipment: This will include the air-conditioner, water-dispenser, microwave, telephone, refrigerator, etc. that are used in your office or business premises

What is the cost of a particular Fixed Asset?

The cost of a fixed asset for the purpose of accounting and taxation will include not only the cost of the asset, but also the expense(s).

These incurred to get it installed and working like delivery charges, acquiring charges such as stamp duty and import duties, costs of preparing the site for installation of the asset, professional fees, such as legal fees and architects’ fees etc.

How to Account for Fixed Assets?

For every fixed asset, the law makes it compulsory for a business to provide for depreciation of the asset every year of its useful life.

Accounting Standard 6 issued by the Institute of the Chartered Accountants of India defines ‘depreciation’ as “a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.

Depreciation includes amortization of assets whose useful life is predetermined.” The amount to be charged as depreciation depends on the total cost of the asset, expected useful life of the asset and its residual cost.

There are several methods of allocating depreciation over the useful life of the assets. Those most commonly used methods are the straight-line method and the reducing-balance method.

Choose the best method depending on the type of asset, the nature of the use and circumstances prevailing in the business.

Income Tax Provisions:

The Income tax Act provides for charging depreciation against the Profit and Loss Account of a business. However, section 32(1) lays down conditions for claiming depreciation. They are:

  1. The assets must be owned, wholly or partly, by the assesse.
  2. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.
  3. TThe asset should be actually used for the purpose of business or profession of the assesse.
  4. Depreciation is not allowable on the cost of land.
  5. Depreciation is mandatory from AY 2002-03 and shall be allowed or deemed to have been allowed irrespective of claim made in the profit & loss account or not.
  6. Where the asset is not exclusively used for the purpose of business or profession, the depreciation shall be allowed proportionately with regards to such usage of assets (sec. 38).
  7. Section 32(1) provides that depreciation is to be computed at the prescribed percentage on the written down value of the asset, calculated with reference to actual cost of the assets minus the depreciation already charged.

Do write into us to tell us if you have found the information in this article useful/relevant.[/vc_column_text]

A company can account for changes in the market value of its various fixed assets by conducting a revaluation of the fixed assets. Revaluation of a fixed asset is the accounting process of increasing or decreasing the carrying value of a company’s fixed asset or group of fixed assets to account for any major changes in their fair market value.

Initially, a fixed asset or group of fixed assets is recorded on a company’s balance sheet at the cost paid for the asset. Afterward, there are two methods used to account for changes in the value of the fixed asset or assets.

Key Takeaways

  • Sometimes, a company's fixed assets – such as property, plant, & equipment – will experience substantial changes in their market prices.
  • When this occurs, the company must account for changes in value using either the cost method or revaluation techniques.
  • Accounting rules allow for either methodology, so management discretion must be used to choose the most appropriate model.

Cost Model

The most straightforward accounting approach is the cost model. With the cost model, a company’s fixed assets are carried at their historical cost, minus the accumulated depreciation and accumulated impairment losses associated with those assets. The cost model does not allow for upward adjustments in the value of an asset based on the fair market value.

The primary reason companies might choose the cost approach to valuation is that the resulting number is much more of a straightforward calculation with far less subjectivity. However, this approach does not offer a way to arrive at an accurate value for non-current assets since the prices of assets are likely to change with time—and the price doesn't always go down. Quite often, they go up. This is particularly true for assets such as property or real estate.

Revaluation Model

The second accounting approach is the revaluation model. With the revaluation model, a fixed asset is originally recorded at cost, but the carrying value of the fixed asset can then be increased or decreased depending on the fair market value of the fixed asset, normally once a year. If an asset reduces in value, it is said to be written down. Under International Financial Reporting Standards (IFRS), assets that are written down to their fair market value can be reversed, while under generally accepted accounting principles (GAAP), assets that are written down remain impaired and cannot be reversed.

The main advantage of this approach is that non-current assets are shown at their true market value in financial statements. Consequently, the revaluation model presents a more accurate financial picture of a company than the cost model. However, revaluation must be re-done at regular intervals, and management may sometimes be biased and assign a higher revalue than is reasonable for the market.

Revaluation vs. Cost: How Do You Choose?

The decision of choosing between the cost method or the revaluation method should be made at the discretion of management. Accounting standards accept both methods, so the deciding factor should be which method is the best fit for the unique needs of the business in question. If the business has a greater proportion of valuable non-current assets, revaluation might make the most sense. If not, then management may need to go deeper to reveal the factors needed to make the best decision.

Just remember that for a revaluation model to function properly, it must be possible to arrive at a reliable market value estimate. If reliable comparisons to similar assets (such as past real estate sales in a neighborhood) are possible, then the subjectivity of the revaluation is decreased, and the reliability of the revaluation increases.

Run the Fixed Assets to General Ledger Reconciliation report. To run this report, point to Fixed Assets on the Reports menu, and then click Activity. In the Reports list, click Fixed Assets to General Ledger Reconciliation, and then press ENTER.

Run the Fixed Assets Inventory List by Class report. To run this report, click Fixed Assets on the Reports menu, and then click Inventory. In the Reports list, click
Fixed Assets Inventory List by Class.

Run the Annual Activity report. To run this report, click Fixed Assets on the Reports menu, and then click Activity. In the Reports list, click Annual Activity, and then press ENTER.

In the following scenarios, errors may cause the entries in Fixed Assets to be out of balance with General Ledger:

An asset is deleted in Fixed Assets. This asset was interfaced with General Ledger. And, a general entry was not created in General Ledger to back out the information for the asset. When you delete an asset, a report is automatically printed. This report tells you what activity has occurred for the asset. If the line item has been interfaced with General Ledger, the report contains a batch number.

The correct General Ledger account is not setup in Fixed Assets to default on the transactions.

An incorrect book is set up as the Corporate Book in the Fixed Assets Company Setup window .

Typically, the balances are already in General Ledger during the initial setup of Fixed Assets. The balances may have been entered as Payables Management transactions. Or, the balances may have been entered manually in General Ledger. After you add all the assets into the system, run a dummy General Ledger interface. When you do this, enter 0000-000 in the Begin Date field and in the End Date field of the period through which the assets are currently depreciated. Then, delete the batch in General Ledger. This step updates each asset and uses the flag with which the assets were interfaced. However, because the batch is deleted, it does not affect the General Ledger. If you forget to create and delete the dummy batch, there is a risk that you will run an interface in the future that will update General Ledger again.

You use the interface from the Payables window or from the Purchase Order Processing window, and you do not add all the assets into Fixed Assets. If you use a true clearing account in purchasing, the balanceremains in the clearing account. You can check this account to verify that all the assets have been entered into Fixed Assets. If you do not use a true clearing account, view the FA-AP Post Table Inquiry window to verify that all the assets have been added. To do this, use one of the following steps:

In Microsoft Business Solutions – Great Plains Dynamics 7.0 and in later versions, click Inquiry, click Fixed Assets, and then click Purchasing Transactions.

In Great Plains 6.0, click Inquiry, click Fixed Assets, and then click FA-AP Post Table.

If you use the Purchase Order Processing “by receipt” line, the clearing account should be the same account that is debited in Purchase Order Processing. The clearing account is the account that is credited when an asset is added in Fixed Assets. For example, if you use the Fixed Assets account in Purchase Order Processing, the clearing account should be set up as the Fixed Assets account. If the clearing account is not set up as the Fixed Assets account, the Fixed Assets account is debited two times.

The following tables describe the accounts that are used when you post an invoice in Purchase Order Processing in Microsoft Dynamics GP.

In the previous article, we have covered the journal entry for disposal of fixed assets which mainly focuses on the discard and sales of fixed assets.

In this article, we cover the accounting for exchange of fixed assets which is part of the fixed asset disposal. This includes the journal entry for gain and loss on exchange of fixed assets.

Let’s get started!

What Does Exchange of Fixed Assets Mean?

The exchange of fixed assets refers to one way of fixed assets disposal where one entity agrees to receive a fixed asset in exchange for another company’s fixed asset. Typically, there are two types of exchange of assets. These are changes for similar assets and dissimilar assets. For the purpose of this article, we cover only the exchange of similar assets.

The accounting for exchange of fixed assets which similar in nature depends on whether the net book value of assets to be given up is more or less than the current market value of the assets to be received. When the net book value of assets given up is higher than the market value of assets to be received, it is considered a loss on exchange. This loss is recorded as an expense and presented in the income statement as a non-operating expense.

In contrast, if the net book value of the assets given up is lower than the current market value of the assets to be received, it is considered as a gain on exchange. This gain shall not be recorded as income and it should not be presented in the income statement. Instead, such gain shall be deducted from the market value of the new assets received.

How to Account for the Exchange of Fixed Assets?

As mentioned above, the exchange of fixed assets may result in gain or loss. The journal entries for gain or loss on the exchange of fixed assets are different.

For loss on the exchange of fixed assets, the company records the new assets received at its market value and derecognize both old assets given up both its cost and the accumulated depreciation.

In contrast, if there is a gain on the exchange of assets, such gain shall not be presented in the income statement. The company records the new assets received at its market value less the gain on the exchange or at the amount of cash paid for the new assets plus the net book value of old assets given up and then derecognize the old assets given up from its Balance Sheet.

In order to illustrate how to account for this exchange of fixed assets, let’s go through together the examples in the section below.

Example of Loss on Exchange of Fixed Assets

Let’s assume that ABC Co exchanges its old equipment for new equipment with XYZ Co. ABC Co paid in cash for the new equipment at $30,000. The old equipment of ABC Co given up is originally at a cost of $$35,000 and has the accumulated depreciation of $20,000 at the time of exchange. The new equipment to be received has a current market value of $40,000.

Example on Gain on Exchange of Fixed Assets

As the accounting rule in accordance with the conservatism principle, the gain on the exchange of assets shall not be recorded as income and presented in the income statement. Instead, the value of the new asset shall be recorded at the amount of cash paid for such exchange plus the net book value of old assets given up.

The Bottom Line

The accounting for the exchange of fixed assets shall be carried out properly depends on whether there is gain or loss on the exchange of fixed assets. If there is a loss on the exchange, the new assets shall be recorded at their market value. However, if there is a gain on exchange, the new assets shall be recorded at the amount of cash paid for the new assets plus the net book value of old assets given up.

The fixed assets journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of fixed assets.

In each case the fixed assets journal entries show the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section.

Typical Fixed Assets Journal Entries

Purchase of fixed assets journal entry

Account Debit Credit
Fixed assets XXX
Cash XXX
Journal entry to record depreciation

Account Debit Credit
Depreciation expense XXX
Accumulated depreciation XXX

Gain on sale of asset journal entry

Account Debit Credit
Cash XXX
Accumulated depreciation XXX
Fixed assets XXX
Gain on disposal XXX
Loss on sale of asset journal entry

Account Debit Credit
Cash XXX
Loss on disposal XXX
Accumulated depreciation XXX
Fixed assets XXX
To remove a fully depreciated asset

Account Debit Credit
Accumulated depreciation XXX
Fixed asset XXX
Asset write off journal entry

Account Debit Credit
Accumulated depreciation XXX
Loss on disposal XXX
Fixed asset XXX

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

The accruals concept dictates that incomes be recognized when earned or due and not when they are received. Similarly, expenses are incurred when goods or services are received and not when payment is made. Fixed assets result from capital expenditure. At the end of the year, entries for acquisition, depreciation, conversions and disposal of fixed assets should be passed in accordance with the accruals concept so as to reflect the true status of the fixed assets accounts during the financial period.

Write off the depreciation of fixed assets. Two entries are required for depreciation; one is the depreciation expense and the other is accumulated depreciation. Depreciation expense is transferred to the profit and loss statement while the accumulated depreciation is posted to the balance sheet to show the net value of the fixed assets. Fixed assets are acquired at cost. The depreciation expense is spread out to cover the assets useful life. Create a depreciation schedule to capture the depreciation expense for every category of fixed assets.

Raise proper entries to recognize capital expenditure incurred in the acquisition of fixed assets. Some assets are paid for in full while others, especially those that involve large sums of money, are partly paid. Corporate firms enter into agreement with banks and other financial institutions to finance assets, such as aircraft and ships. At the end of the year, such acquisitions constitute additions to fixed assets. Regardless of whether an asset is fully paid or not, it is reflected in the books at total cost.

Write off assets disposed of by the company at the end of the financial period. A company may decide to do away with fixed assets because of old age or obsolescence. In such a circumstance, the year-end adjustments will have to acknowledge this movement. The affected fixed asset account is reduced with the cost of disposed asset. Accrued depreciation expense is then estimated and written off accordingly, particularly if the asset was disposed midyear. Accumulated depreciation of the disposed asset is also removed. The net effect is that the fixed assets schedule is left with figures relating to assets still in a company’s possession.

Recognize the conversions of assets or expenses made by your company within the financial period in the end of year accounts. Based on the policies set about by a company, some expenditure may need to be capitalized or the company may want to treat some acquisitions of assets as expenses. The threshold of capital expenditure varies from one organization to another. It also depends on the size of the organization, among other factors. All the same, where a conversion is being made, a journal entry will be passed at the end of the year either capitalizing an expense or treating an asset acquisition as an expense.

Consult a certified public accountant to assist in accounting for accrued fixed assets.

When a fixed asset or plant asset is sold, there are several things that must take place:

  1. The fixed asset’s depreciation expense must be recorded up to the date of the sale
  2. The fixed asset’s cost and the updated accumulated depreciation must be removed
  3. The cash received must be recorded
  4. The difference between the amounts removed in 2. and the cash received in 3. is recorded as a gain or loss on the sale of the fixed assets

Example of Entries When Selling a Plant Asset
Assume that on January 31, a company sells one of its machines that is no longer used for $3,000. Depreciation was last recorded on December 31. Also assume that the depreciation expense is $400 per month and the general ledger shows the machine’s cost was $50,000 and its accumulated depreciation at December 31 was $39,600.

On January 31, the date the machine is sold, the company must record January’s depreciation. This entry debits $400 to Depreciation Expense and credits $400 to Accumulated Depreciation.

Also on January 31, the company must debit Cash for $3,000 (the amount received); debit Accumulated Depreciation for $40,000 (the balance after the January 31 entry); debit Loss of Sale of Fixed Assets $7,000; and credit Machines for $50,000.

The $7,000 loss recorded on January 31 is the result of removing the machine’s book value of $10,000 (cost of $50,000 minus its accumulated depreciation of $40,000), and replacing it with $3,000 of cash.

If the cash that the company received was greater than the asset’s book value, the company would record the difference as a credit to Gain on Sale of Fixed of Assets.