Businesses utilize various kinds of assets to create value—from sophisticated machinery and digital products to cash on hand. Among them, fixed assets are those with the greatest long-term financial and operational consequences.
What are Fixed Assets?
A fixed asset is a long-term tangible piece of property or equipment that a firm owns and utilizes in its operations to generate income. Fixed assets are thought to be durable, consumed, or converted into cash after at least one year, so companies may deduct their value to account for wear and tear. Fixed assets are frequently listed on a company's balance sheet as property, plant, and equipment (PP&E)."
Fixed assets are frequently used in a company's daily operation to produce goods and services.
Following are some examples of fixed assets used in a typical business environment:
Office equipment & machinery
Buildings
Manufacturing equipment
Computer equipment
Furniture
Vehicles
Fixed assets such as servers, transportation vehicles, and elevators are examples of things that require a large initial investment. They might contribute a substantial proportion of a company's net worth. A company's chances of maximizing its investment are enhanced if it manages its assets well and efficiently.
Fixed assets begin to depreciate as time passes. Because they provide long-term revenue, these assets can be expensed differently than other items. However, amortization is used for intangible assets, whereas physical assets continually depreciate. Therefore, the asset's value is lowered as depreciation on the balance sheet increases. Then the company can assess the asset's price in relation to its long-term value.
An asset's depreciation might lead to a discrepancy between the book or balance sheet values and the current market values. For example, the land is not depreciated.
How to Effectively Manage Fixed Assets
Financial accounting, preventive maintenance, and theft deterrence are all objectives of fixed assets management. Organizations often have difficulty tracking the condition, quantity, maintenance schedule, and depreciation status of their fixed assets.
A popular approach to tracking fixed assets uses serial-numbered asset tags, which are labels with barcodes for simple and accurate reading. Using a mobile barcode reader, an inventory can be taken, and a report produced.
Let's discuss how you can improve fixed asset management for your company:
An expenditure is capitalized as a fixed asset or considered as an incurred expense depending on a capitalization policy's monetary threshold. Ideally, this policy is combined with other accounting standards and policies.
If an item is purchased that exceeds the threshold, it is capitalized in the fixed asset register, shown on the schedule, and depreciated over its useful life. Otherwise, it's an expense and becomes a part of the profit and loss account.
For example, suppose that your company has a $1,000 capitalization policy. You purchase a computing system for $1,200 and a desk for $350. In this case, the desk will be expensed immediately as office supplies, whereas the computer will be added to a fixed asset and depreciated over its useful life.
An accurate list of a company's fixed assets is critical to asset managers. After all, you can't manage things you don't know about. It appears, however, that many businesses do not adequately track their assets.
According to experts, up to 65% of fixed asset data is missing, incorrect, or incomplete, especially in asset-heavy companies.
If you desire to make an accurate inventory of your possessions, you may want to assume that your existing information is incorrect and begin from scratch. That means meticulously documenting and labeling every item you own. Once you've finished that, you will have a reliable foundation to build on.
Here is the information you may want to collect related to your fixed assets:
Item location
Status and condition of the item
Necessary assessment and checks
Depreciation and expiry dates
Industry and company-specific data
With a complete list of fixed assets, you may notice that your records have assets that aren't working in order or even not really there. There can be some assets that a company cannot account for - these are called “ghost assets.”
They may not be listed because they were stolen, lost, sold without a record, or otherwise rendered unusable, possibly because they were damaged or no longer functioned.
However, the reason these assets are considered "ghosts" is that the firm in question still includes them on its balance sheet and/or marks them as active in its fixed asset management system, despite the fact that those assets are no longer in use.
It's critical to create a complete list of fixed assets because of ghost assets. Because you might still be paying insurance and maintenance fees for them, which would negatively impact your funds, you should be aware of them
It's crucial to keep in mind that your list of fixed assets should be a part of a larger fixed asset management system. That applies double if you operate a big company and own a lot of them.
Spreadsheets have been the primary tool for accomplishing this goal for a very long time. Although spreadsheets have numerous benefits and they have played a significant role in constructing the contemporary economy, they also suffer from a number of issues, and the most significant of them is they're prone to errors.
So, what type of system can streamline this important task of fixed asset tracking? The answer is straightforward: software.
With asset management software, you can track your assets in real-time and benefit from both sides of the coin—financial and operational.
Among the many benefits of the asset management system, the following are the crucial ones:
Prevent items from mixing up by tagging them
Eliminates ghost assets
Brings transparency to the asset life cycle, making it easy to track
Streamline regular inventory
Understanding the phases of a fixed asset's life can assist you in making smarter procurement choices, enhancing your procurement process, and meeting your maintenance demands.
Understanding the phases of a fixed asset's life can assist you in making smarter procurement choices, enhancing your procurement process, and meeting your maintenance demands.
Since it is crucial for asset management to keep costs down throughout an asset's lifetime, it is worthwhile to track it through these five basic phases of its existence.
Acquisition: Prevent items from mixing up by tagging them
Depreciation: Eliminates ghost assets
Revaluation: Brings transparency to the asset life cycle, making it easy to track
Impairment: Streamline regular inventory
Disposal: The asset has reached to end of its life cycle; you either sell it, recycle it, or dispose of it
This way, you know precisely when their depreciation should start for certain belongings—as soon as they are procured. This may seem like an insignificant issue, but many organizations struggle with it.
Hence, it is clear that monitoring your asset's life cycle is crucial to asset management. Keeping track of it can tell you when you should get rid of the asset and restart the cycle. It can even help you save money.
Assets can be stolen, misplaced, or broken without you even knowing about them. Remember the 65 percent figure for incomplete fixed asset data? That's where periodic reviews of your assets come in.
Periodic reviews are basically periodic inventories and reconciliations. They help you discover both your 'ghost' and 'zombie' assets. As we already explained, ghost assets are still on the books but are nowhere to be found.
Whereas zombie assets are things your organization has, but no one knows how they got them since they're not on the books. This means that:
They’re not insurance covered
They’re not insurance covered
Hence, it is critical to take inventory regularly. These inventories can be used to identify missing fixed asset records, their location, and their condition (operational or non-operational).
Fixed Asset Management is Inevitable
Fixed assets, as a category, are usually the main investment on a company's balance sheet. If up to a third of its capital assets are unaccounted for, this creates a range of problems, among which overpaid taxes and insurance are just the first.
A company might have a lot of untracked assets if it does not closely monitor and regularly evaluate the life cycle of its assets. Hence, it's crucial to put significant focus on fixed asset management.
If you have any trouble managing your fixed assets and need immediate assistance, feel free to reach us for CPA and accounting services.
