FIXED ASSETS

This is one of the business terms that “non-accountants” try to avoid, or even ignore entirely. I am simplifying it for you. It’s actually quite simple; it just takes some commitment and understanding. Enjoy the learning experience.

What are Assets?

It is very important to understand this. Everything your business has or owns is an asset. Everything, without exception. Let’s dig a little deeper into this; consider the following.

Bank account balances (when positive) are current assets

Petty cash account balances are always current assets.

Long-term investments owned by the company are fixed assets

Available raw materials are current assets

Stock of work in progress is a current asset.

Stocks on hand are a current asset

Available stationery is a current asset

Available cleaning materials are a current asset

The total balance of the Debtor is a current asset

Motor vehicles are fixed assets.

Machinery is a fixed asset

Land and buildings owned by the company are fixed assets

Computer equipment is a fixed asset.

Furniture and accessories are fixed assets

What are fixed assets?

In accounting terms there are generally two types of assets; Fixed Assets and Current Assets. The only difference between them is that current assets have a short useful life, less than one year; while fixed assets have a longer life; usually two years and more. These two types of assets are also treated separately on the balance sheet. That’s all, very simple. not so?

For example, the company’s petty cash book (account) is a current asset. Because? Because the value changes daily, it is not stagnant or fixed. And it is very small compared to fixed assets like buildings, land, machinery, etc. Also compare it to a fixed investment, which is usually long-term in nature.

Toilet paper, stationery, stock, raw materials, cleaning materials, staff snacks and the like will not exist for long. No more than one month before you have used them and need to replace them. However, you will have land and buildings, vehicles, furniture, machinery, computers, and office equipment for at least three years before you replace them; if not much more. The latter are Fixed Assets.

Another type of fixed asset to highlight is an intangible asset; an item or asset that you cannot touch or see. Above we talked only about tangible assets, things that physically exist. Intangible assets are:

Royalties

patents

Trademarks

investment

Fixed asset categories

land and buildings

Machinery and special tools

Office furniture

computer equipment

Motor vehicles

investment

Royalties

These are the more general fixed assets. For a detailed list, please refer to the internationally accepted accounting practices document or the stipulated list of recognized fixed assets from the local Tax Service.

REGISTRY OF FIXED ASSETS

It is vitally important that you keep track of your Fixed Assets in a Fixed Asset Register, either in a spreadsheet or in a physical book. A database program can also be used, which automates the procedure and is often accurate. You can look for them on the Internet and in your local computer stores.

Your accountant will also have a fixed asset register that will need to be updated each year for auditing and/or filing of annual financial statements. Always check yours against yours, make sure they are up to date and 100% correlate.

The added benefit is that you will keep tabs on your accountant/auditor.

Is an asset a luxury?

This is a question that company directors must regularly confront. Luxuries have negative effects on cash flow and earnings and should be avoided.

For example, you need to buy a company car. What size and price group is the most appropriate? Is it to impress other entrepreneurs? Is it to make the person feel important? To what extent will it be for the person’s personal use? Can we really afford it? Think carefully; don’t spend too much and then wonder why you have a cash flow problem.

It’s surprising how often a large sum is paid for an asset, while more affordable options are available. Often, machinery is purchased that is too productive. Its capacity is well above what is really needed. The mindset is often, “okay, let’s just spend $250,000 and overbuy”, instead of getting stuck with something that may become too small and only cost $150,000.

This is a valid argument, but it can be very misleading.

Always go back to your original business plan. Consider the planned production and sales plan, and then act on it; or review the business plan. The worst thing would be to produce 5,000 products per month when there is only a monthly need of 2,000 (estimated capacity) in the market for the next eight years. You’d be stuck with 3,000 products a month, hoarding them and paying storage for them; because they are not going anywhere. FATAL ERROR.

Do you see how important your business plan is? And what needs constant review and review? Treat it as a dynamic living document; your business bible

When considering the purchase of a fixed asset:

Start with the minimum requirement when considering a new/replaced fixed asset

When considering the purchase of an asset, always think about the minimum requirement first and build from there. There are many factors to take into account; here are some:

– Have you exhausted the list of suppliers?

– Have you used all resources to obtain this information?

– Have you considered all the variables, eg size, capacity, life expectancy, price, ease of use?

– Have you researched the past history of the models you are considering buying?

– Have you analyzed the reliability, maintenance and service requirements?

– To what extent does the purchase of the asset impact your cash flow? Do you have enough cash? Do you need to take out a long-term loan or buy the asset on an installment purchase agreement? Would it require a larger capital investment by the directors/owners to acquire it?

– Can you afford it, or is there a cheaper solution or alternative?

Mistakes made in this regard are unnecessary. It is much better to spend the time and take all the precautions to ensure that you make the right decision.

insure all assets

This is vitally important. Make sure your assets are insured at their correct values; thus ensuring that they are not over or under insured. This will cost you more money in the long run.

Overinsured means spending money each month on a high premium and getting much less if a claim is filed. Underinsuring means paying a lower monthly premium but receiving next to nothing if a claim is filed.

Always make sure that your insurance information is updated, correct and verified by the insurers.

Depreciation, Revaluation and Derecognition of Fixed Assets

– Depreciation

Depreciation is always done annually. For management reports and for good corporate practices, it is better to do it monthly. This also facilitates more accurate monthly business operating reports.

Remember, you don’t want to omit any hidden costs, such as depreciation, from your operating reports.

Depreciation can be calculated using two standard methods; The straight line method or the decreasing balance method.

The straight line method

Required facts and figures:

The life expectancy of the asset (for example, vehicles are typically 5 years)

Purchase price (or actual value) PLUS any additional costs (for example, shipping cost and installation cost)

– Calculation example:

Vehicle cost $60,000. Depreciable in 5 years (60 months)

60,000 divided by 5 = $12,000 per year or $1,000 per month

The Declining Balance Method:

This method is done using the same information as the previous one, except that the depreciation percentage is always calculated on the diminished value.

Calculation example:

Because a vehicle can depreciate in five years, the annual percentage rate is then 20%.

First year: 60,000 X 20% = $12,000 (same as above)

Second year: 48,000 X 20% = $9,600 (much less)

Etc.

The problem with this method is that the depreciated value never reaches zero. It’s complex, and the straight line method always works best for me. I suggest you use it too.

Revaluation of Fixed Assets

Revaluations can be tricky and should be avoided whenever possible. The only moments in which a revaluation of a fixed asset is valid are in two instances:

1. The asset was entered on the books with an incorrect value.

GOLD

2. The market value of the asset fluctuates and the new market value is actually and materially different from the original purchase price plus related costs.

This article is written for business owners and managers. If you experience such an occurrence, talk to your accountant about recalculating value and depreciation, as this is a complicated accounting procedure. Remember that there will also be a revaluation gain or loss, which must be reflected in your financial statements.

Cancellation of fixed assets

This occurs when an asset is stolen, destroyed, or has become totally beyond repair at a decent cost. This is another instance, which will require the attention of your accountant. There are usually write-off losses on fixed assets, unless the asset is so old that it has no current value. This requires special accounting attention.

If you dispose of a fixed asset, remember that there will be a gain or loss on the disposal and this must be reflected in the financial statements. Talk to your accountant about it, as it requires special accounting attention.