If you’re a business owner or an accountant, you’re well aware fixed assets play a crucial role in your company’s financial health. So how can you use fixed asset accounting in your EAM processes to manage such a key factor of your business? We’ll cover that and a lot more.
What This Article Covers:
- What Is Fixed Asset Accounting?
- Depreciation Methods
- Common Challenges
- Best Practices
- Why You Need Fixed Asset Accounting Software
- Next Steps
What Is Fixed Asset Accounting?
Fixed asset accounting is the process of tracking and managing a company’s fixed assets, such as buildings, equipment and vehicles. Fixed assets are the ones you expect to provide value to the company over a period of more than one year.
Fixed asset accounting involves recording the acquisition cost of fixed assets, including any associated costs such as installation and depreciation tracking. Depreciation is the reduction in value of the asset over its useful life, and you typically calculate it using various methods such as straight-line, double-declining balance and sum-of-the-years digits.
In addition to tracking fixed assets’ acquisition costs and depreciation, fixed asset accounting also involves managing and maintaining an accurate inventory of fixed assets, tracking asset movements between locations or departments, and properly disposing of assets when they’re no longer needed.
Fixed asset accounting is important for financial reporting purposes. It provides information about the value and useful life of your company’s fixed assets, which is critical for calculating net worth and determining tax liability. Proper fixed asset accounting can also help you make informed decisions about when to repair or replace assets and prevent loss or theft of valuable assets.
Depreciation Methods
Depreciation is critical to fixed asset accounting, as it reflects the decrease in fixed assets’ value over time. Here are some of the most common types of depreciation methods.
- Straight-Line Method: This method entails dividing the asset’s cost by its useful life. As a result, a consistent depreciation expense is incurred each year.
- Double-Declining Balance Method: This method is an accelerated depreciation method that calculates depreciation by doubling the straight-line rate and applying it to the remaining book value of the asset each year. This method results in higher depreciation expenses in the early years of an asset’s life and lower expenses in later years.
- Sum-of-the-Years’ Digits Method: The sum-of-the-years’ digits method is another accelerated depreciation method that calculates depreciation by multiplying the remaining useful life of the asset by a fraction that decreases each year.
Choosing the appropriate depreciation method for fixed assets depends on several factors such as expected useful life, pattern of use and tax regulations. Regardless of the method chosen, it’s essential to maintain accurate depreciation expense records to ensure proper fixed asset accounting.
Inaccurate or incomplete fixed asset accounting can lead to over or underestimation of your company’s net worth, which can affect your ability to secure loans or investments. Furthermore, if your company doesn’t comply with tax regulations regarding fixed asset accounting, it can result in financial penalties and additional taxes.
Common Challenges
Fixed asset accounting can be complex, and companies may face several challenges when tracking and managing their fixed assets. The following are some common challenges you may encounter.
Tracking Assets Across Multiple Locations
You may find it challenging to track fixed assets accurately if you have multiple locations, especially if you move assets frequently. Keeping up-to-date inventory of all fixed assets, including their location and condition, can help address this challenge.
Maintaining Accurate Records
Proper fixed asset accounting requires maintaining accurate and up-to-date records of asset acquisition, disposal, depreciation and maintenance. It can be challenging to track changes to asset information, such as repairs, upgrades or disposals, especially without a clear policy.
For example, a lack of repair records can lead to various other challenges down the line. You could be over-servicing an asset when you’d be financially better off replacing it. But you won’t know if you don’t have the records to keep track.
Calculating Depreciation
Calculating depreciation can be complex, especially if your company has many assets with different useful lives and depreciation methods. Errors in calculating depreciation can result in inaccuracies in financial statements and tax returns. Using an automated fixed asset accounting system can help ensure accurate depreciation calculations.
Complying With Tax Regulations
Tax regulations governing fixed asset accounting can be complex and vary by jurisdiction. Failure to comply with tax regulations can result in penalties and fines. Staying up to date with tax regulations and seeking the advice of tax professionals can help you ensure compliance.
Mitigating Mismanagement & Theft
You need proper controls and procedures for asset management to mitigate mismanagement and theft threats. Implementing internal controls, such as regular physical verification of assets and limited access to sensitive asset information, can help address this challenge.
Best Practices
You need to follow some best practices to ensure accurate fixed asset accounting tracking and management. The following are some of the best practices you can adopt.
Establish a Fixed Asset Policy
A clear and comprehensive fixed asset policy can provide guidance on asset acquisition, depreciation, disposal and asset tracking. You should regularly review and update the policy to reflect changes in your company’s operations and tax regulations.
Determine a Capital Threshold
To ensure accurate accounting, establish a standard to differentiate between assets and expenses. Record items with a useful life of more than a year as assets. This approach is beneficial as it allows for clear distinction between various accounts and helps prevent material errors in financial statements.
Conduct Regular Physical Asset Verification
Regularly verifying fixed assets can help ensure you’re accurately reflecting assets’ location, condition and useful life in your accounting system. This can help prevent asset misappropriation, identify missing or damaged assets, and ensure compliance with tax regulations.
Train Employees
Proper fixed asset accounting requires multiple departments’ involvement, including finance, procurement and operations. Ensuring that employees understand the importance of fixed asset accounting and their role in the process can help improve accuracy and efficiency.
Use Asset Management Software
Deploying asset management software can help streamline fixed asset accounting processes by automating data entry, tracking asset locations and conditions, and generating reports on asset performance.
Why You Need Fixed Asset Accounting Software
Here are some key benefits of using fixed asset accounting software or EAM platforms with accounting tools.
- Automated Data Entry: Manual data entry is time-consuming and prone to errors. Fixed asset accounting software can automate data entry, reducing the risk of errors and saving time.
- Accurate Depreciation Calculations: It can calculate depreciation automatically, reducing the risk of errors and ensuring accurate financial statements and tax returns.
- Efficient Asset Information Tracking: It can track asset information such as acquisition date, useful life and depreciation method in real time.
- Streamlined Asset Disposal: It can streamline asset disposal. The software can track asset disposal and generate documentation, reducing the risk of errors and ensuring compliance with tax regulations.
- Enhanced Reporting: It can generate reports on asset performance, depreciation and maintenance, enabling you to make informed decisions about asset management.
When choosing fixed asset accounting software, you should consider your specific needs and budget. Some software may offer more advanced features, such as barcode inventory systems and mobile access, while others may be more budget-friendly with limited features.
It’s also important to choose software that integrates with other systems such as enterprise resource planning (ERP), inventory management and supply chain management.
Next Steps
Fixed asset accounting is crucial to financial management for businesses of all sizes. Proper fixed asset management can help you make informed decisions about asset investments, maintenance and disposal. Inaccurate fixed asset accounting can lead to errors in financial statements, tax returns and regulation compliance.
By understanding the basics of fixed asset accounting, you can implement best practices to ensure accurate tracking and management. This includes keeping up-to-date inventory of all assets, maintaining accurate asset and change records, and using appropriate depreciation methods.
To take the next steps towards maximizing asset usage, consider implementing an EAM system. You can check out our free comparison report for an in-depth look at the top products.
What steps have you taken to improve your fixed asset accounting practices? Let us know in the comments below.