Fixed assets refer to assets that a company owns and uses in its business operations for a long period of time. As a general rule of thumb, fixed assets cost more than $500. Unlike current assets, which are expected to be converted into cash within a year, fixed assets are used to generate revenue over an extended period of time and provide a long-term benefit to the business.
Examples of Fixed Assets
Fixed assets can take many forms, including real estate, machinery, equipment, vehicles, furniture, and fixtures. These assets are typically purchased with the intention of using them for several years, and they are recorded on a company’s balance sheet as property, plant and equipment.
Recording Fixed Assets
When a company acquires a fixed asset, it needs to record the asset’s cost on its balance sheet. This cost includes not only the purchase price of the asset, but also any additional costs incurred to get the asset ready for use, such as installation or delivery fees. If there is a loan on the asset, this is recorded as a liability on the balance sheet.
If you recently incorporated and have tools or equipment that you personally own, then you can sell these to your company by drafting a bill of sale from yourself to your company. The value should be the fair market value (an approximate value if you were to actually sell them). Your company can then pay you for the asset tax free or create a credit to your shareholder loan.
If you used these assets as a sole-proprietor before setting up a corporation then there may be extra steps taken to sell these to your business. Speak to your accountant if this applies to you.
Accounting for Fixed Assets
Managing fixed assets can be a complex process, and it requires accurate and detailed record keeping but it’s an essential part of a company’s financial management. Companies use various methods to account for their fixed assets, including depreciation, which is the process of allocating the cost of an asset over its lifetime.
Over time, fixed assets lose value due to wear and tear, obsolescence, or other factors. To account for this loss in value, companies use a process called depreciation. Depreciation allows a company to spread the cost of a fixed asset over its useful life, rather than expensing the entire cost in the year of purchase.
There are several methods of depreciation, two of which being, straight-line depreciation, which spreads the cost of the asset evenly over its useful life, and accelerated depreciation, which front-loads depreciation in the earlier years of the asset’s life.
Disposing of Assets
When an asset is sold or disposed of, it needs to be recorded in the bookkeeping. The gain or loss on the disposal of the asset is calculated by taking the difference between the disposal proceeds and the net book value of the asset. The gain or loss is then recorded.
It is important to let your bookkeeper or accountant know of any asset purchases or disposals so they can be accounted for.
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