In the world of accounting, “assets” refers to the wealth a business has when doing business. These assets are always valued and then included in the financial statements. As a result, accountants must be well versed with the different types of assets found in the accounting world.
Various types of assets include fixed, current, and non-fixed assets. Each type of asset has its understanding, character, and function.
What is a fixed asset? What distinguishes it from a company’s inventory? This article explains the meaning of fixed assets. There are examples, characteristics, ways of acquisition, and examples of transaction journals described in detail but simply.
Fixed Asset Definition
Fixed assets are non-current, tangible assets owned and used by a company in its operations to generate income. Therefore, it has greater useful lives than current assets and is not expected to be consumed or converted into cash within a year. Also, these assets are different from inventory items, because the latter are purchased for the purpose of resale, while the former are purchased for operational purposes.
If you think that fixed assets (items like chairs or tables) equal inventory, you’re wrong. Fixed assets are an essential item for a company and are bought or rented only once in a few years.
Fixed Asset Characteristics
Acquiring fixed asset is for the purpose of producing or supplying goods or services, for leasing to third parties, or for use in the company. The term “fixed” indicates that these assets will not be use or sell in the accounting year. Thus, it usually has a physical form and is on the balance sheet as property, plant and equipment.
Fixed assets are initially recorded as assets, and then subject to general accounting transaction types such as:
- Periodic depreciation (for tangible assets) or amortization (for intangible assets)
- Impairment write-downs (if the value of an asset declines below its net book value)
- Disposition (once assets are disposed of)
Fixed Asset Documentations
When a company acquires or disposes of their fixed assets, this must be recorded on the cash flow statement. The purchase of fixed assets is a cash outflow to the company, while the sale of fixed assets is a cash inflow. If the value of an asset falls below its net book value, the asset is impaired. The value of the fixed asset recorded on the balance sheet is adjusted downward, because it is considered too high compared to the market value.
When a fixed asset has reached the end of its useful life, it is usually sold in an attempt to obtain a residual value, which is the estimated value of the asset if it was broken down and sold in parts. In some cases, assets may become obsolete and unsuitable for sale. If this happens, they will most likely be donated and the company won’t receive any payment in return. However, whether sold or not, the fixed assets must be written off from the financial statements, because they are no longer used by the company.
Note: An asset management system can greatly help extend the lifespan of your fixed assets through automated tracking and maintenance scheduling.
Examples of Fixed Assets
Here are some examples of fixed assets:
When it come to fixed asset, it does not have to be something immovable. Many fixed assets are portable enough to be routinely moved inside or outside of a company’s premises. Thus, a computer or a laptop can be considered a fixed asset (as long as its cost exceeds the capitalization limit).
Read the related article:
Fixed Asset Acquisition Methods & Journal Entries
After understanding the definition of this assets, including their characteristics and examples, let’s find out how to acquiring and reporting them on the balance sheet!
A. Through Cash Purchases
By acquiring through a cash purchase a fixed asset is record in the books with the amount of money spent on it. The amount of money spent to acquire the fixed asset includes the price listed on the invoice and all costs incurred to make the asset ready for use.
A company buys a machine for Rp. 60,000,000, the related additional costs include VAT for Rp. 6,000,000, an insurance premium for Rp. 500,000, and an installation fee for Rp. 1,500,000.
How it is reported on the balance sheet:
B. Through Credit Purchases
If a fixed asset is acquired through a credit purchase, then the acquisition cost may not include interest. Whether the interest during the installment period is clearly stated or not, it must be excluded from the acquisition cost and charged as interest expense.
A company buys a vehicle on credit for Rp. 300,000,000. The company partially pays Rp. 100,000,000 in cash, and pays the rest with installments in 10 months at an interest fee of 10%.
How it is written off the balance sheet:
|Vehicle Acquisition Cost||300,000,000|
|Installment Fee per Month (10x)||20,000,000|
|Interest Fee of 10% x 10 Months||20,000,000|
C. Through Convertible Security Exchanges
A fixed asset obtained through a convertible security exchange is recorded on the balance sheet according to its stock market price. If the market price of the convertible security and the fixed asset exchanged is unknown, then the exchange value must be determined by the company leader. This exchange value is used as a basis for recording the acquisition cost of the fixed asset and the convertible bond.
A land with a fair market price of Rp. 400,000,000 acquired by a company in exchange for one of its buildings. The acquisition cost of the office building according to journal entries, amounted to Rp 500,000,000 and was depreciated at Rp 200,000,000.
How it is reported on the balance sheet:
|Land Market Price||400,000,000|
|The Cost of Exchanged Building||500,000,000|
|Depreciable Cost of the Building||200,000,000|
|Depreciated Cost of the Building||300,000,000|
D. Through Non-Monetary Asset Exchanges
Many fixed assets are acquired through non-monetary asset exchanges. The old assets are used to pay for the new ones, either fully or partially, where the shortfall is paid in cash. In this case, the acquisition cost must still be included, with the new asset being capitalized at the amount of the price of the old one, added by the money (if any) or capitalized at the market price of the new asset received.
A company wants to exchange its old car with a book value of Rp 135,000,000 from the basic price of Rp 150,000,000. With the depreciable cost being Rp. 15,000,000 and the fair market price being Rp. 160,000,000, the company must pay IDR 10,000,000 in cash to be exchanged for a new car at a fair market price of IDR 170,000,000.
How it is stated in the journal entry:
|The Old Car’s Fair Market Price||160,000,000|
|The Old Car’s Book Value||135,000,000|
|The New Car’s Fair Market Price||170,000,000|
E. Through Donations
An asset acquired through a donation is also called a non-reciprocal transfer (or a one-way transfer). Depreciation of a donated fixed asset is calculated in the same way as other types of fixed assets.
A company receives a land with the acquisition cost of Rp. 80,000,000, but the fair market price of the land is Rp. 110,000,000.
How it is stated in the journal entry:
|Land Fair Market Price||110,000,000|
|Land Acquisition Cost||80,000,000|
F. Manufactured Assets
Due to certain considerations, companies often make their own fixed assets, such as buildings, appliances, and furniture. Companies must allocate all costs including costs of materials, labor, and overhead. Overhead costs usually include electricity, insurance, equipment, and factory supervisors.
To make it easier for you to record the acquisition, sale, and depreciation of your fixed assets, consider using an automated accounting solution. Complete accounting software allows you to calculate, record, track, and forecast all transactions related to your assets instantly, accurately, and efficiently.
Conclusion on Fixed Asset
After knowing the definition, examples, characteristics, journal entries, and acquisition methods of fixed assets, hopefully, you can now better manage all the fixed assets in your company. Robust accounting software will make it easier for you in this regard, allowing you to save a lot of time, minimize human errors, and maintain accurate asset records.
Accounting Software from HashMicro is a solution that enables you to manage all of your business’s financial records. Additionally, the entire system is integrated with a variety of modules, including CRM-Sales, Purchasing, and Inventory Management. Free Demo.