Fixed assets are items that are for long-term use, generally
five years or more. They are not bought and sold in the normal
course of business operation. Fixed assets include vehicles, land,
buildings, leasehold improvements, machinery and equipment.
In an accrual system of accounting, fixed assets are not
recorded when they are purchased, but rather they are expensed over
a period of time that coincides with the useful life (the amount of
time the asset is expected to last) of the item. This process is
known as depreciation. Most businesses that own fixed assets keep
subledgers for each asset category as well as for each depreciation
schedule.
In most cases, depreciation is easy to compute. The cost of the
asset is divided by its useful life. For instance, a $60,000 piece
of equipment with a five-year useful life would be depreciated at a
rate of $12,000 per year. This is known as straight-line
depreciation.
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There are other more complicated methods of fixed-asset
depreciation that allow for accelerated depreciation on the front
end, which is advantageous from a tax standpoint. You should seek
the advice of your CPA before setting up depreciation schedules for
fixed-asset purchases.
Excerpted from Start Your Own Business: The Only Start-Up
Book You'll Ever Need, by Rieva Lesonsky and the Staff of
Entrepreneur Magazine, © 1998 Entrepreneur Press