Elements Of The Accounting System: Fixed Assets How much are your business's assets worth?

Apr 20, 2006

Fixed assets are items that are for long-term use, generallyfive years or more. They are not bought and sold in the normalcourse of business operation. Fixed assets include vehicles, land,buildings, leasehold improvements, machinery and equipment.

In an accrual system of accounting, fixed assets are notrecorded when they are purchased, but rather they are expensed overa period of time that coincides with the useful life (the amount oftime the asset is expected to last) of the item. This process isknown as depreciation. Most businesses that own fixed assets keepsubledgers for each asset category as well as for each depreciationschedule.

In most cases, depreciation is easy to compute. The cost of theasset is divided by its useful life. For instance, a $60,000 pieceof equipment with a five-year useful life would be depreciated at arate of $12,000 per year. This is known as straight-linedepreciation.

There are other more complicated methods of fixed-assetdepreciation that allow for accelerated depreciation on the frontend, which is advantageous from a tax standpoint. You should seekthe advice of your CPA before setting up depreciation schedules forfixed-asset purchases.

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