Fixed Asset Accounting: A Beginner’s Guide

Guide to fixed asset accounting

Welcome to our fixed asset accounting guide.

In this guide, you will learn the basics of fixed asset accounting, including how it works with some examples and some of our tips. Keep in mind that this is just a general guide to help you with the basics of fixed asset accounting.

If you need further information, you should always speak to an accountant first.

What Are Fixed Assets?

Fixed assets are assets that are purchased for long term use and are usually unlikely to be converted to cash. Examples of fixed assets are buildings, land, and equipment, although in some cases, these are not fixed assets.

They are only fixed assets if the business is not looking to convert these assets into cash, but instead use them long term.

Typically, these assets are assets that help you generate revenue or operate your business. For example, if you purchase a laptop that you use for your business, it’s going to help your business generate revenue, so it’s a fixed asset.

Why Is Accounting For Fixed Assets Different?

Standard assets held for sale should be considered stock or inventory, while assets that aren’t should be regarded as fixed assets.

When accounting for fixed assets, the cost of the fixed asset is spread over the time that it is used, instead of when it was purchased.

We do this by putting the purchase as an asset initially, but depreciating the value over time.

Fixed Asset Accounting Example

Here we will look at a real-life example that is easy to grasp using the straight-line method of depreciation.

A business purchases a computer in September for £360, and it has a useful life of 3 years. The accounting year-end is March.

Balance Sheet Debit Credit
Computer Equipment £360.00
Bank £360.00

Fixed Asset Accounting – Depreciation

Accounting for the depreciation will need to be done as follows; this is using the straight-line method.

The computer has a useful life of 3 years or 36 months. The cost of the computer will need to be divided by the months that the equipment is owned during the accounting year. For this example, the depreciation is £10 per month or £120 per year.

There may be a reason why an asset is owned for a few months of the year, which include:

  • Purchased part way through the year
  • The asset is stolen or beyond repair
  • The asset is already fully depreciated

Year one

Equipment is owned for only 7 months, depreciation £10 per month. Depreciation for the year is, therefore, £70 and will be shown in the accounts as follows:

Balance Sheet
Fixed Asset Depreciation Net book value
£360.00 £70.00 £290.00

Depreciation is a double entry and therefore posted as accumulated depreciation in the balance sheet and as a cost in the Profit and loss account.

Tips For Fixed Asset Accounting

To make things a little easier for you, here are some tips for fixed asset accounting.

These are also just some general tips to keep in mind when accounting for fixed assets.

  1. Register Correct Records

The first tip is always to register correct and precise records of your fixed assets. While this may seem obvious to some of you, not registering correct records of your fixed assets can cause some real headaches.

You should always keep the:

  • Purchase date
  • Purchase price
  • Description
  • Location of the asset

Although it is also useful to keep the:

  • Serial number
  • Depreciation
  • Supplier
  • Asset number if used

Depending on the asset and your company, there may also be other information to register. You can read more about fixed asset register if you need a little more assistance.

  1. Be Clear on Your Capitalisation Policy

If you are accounting for fixed assets, you need to set a capitalisation policy. A capitalisation policy is used to set a cost threshold above which the expenses become fixed assets.

Costs below the capitalisation policy are not fixed assets; they are just expenses. For example, if your capitalisation policy is £500, anything that costs below £500 is not considered a fixed asset. Smaller companies may set the policy much lower like £75

Generally speaking, the more revenue your business generates, the higher the capitalisation policy. This is to save yourself time in the calculations and also to make it easier to keep an overview of your costs.

If you would have to note down every single small fixed asset, then that wouldn’t be worth the hassle. It is why we set a threshold which is called the capitalisation policy.

  1. Fixed Asset Accounting – Estimating Useful Life

When estimating the useful life of a fixed asset, you should do so based on the estimated service life. This will give you the most accurate estimates in the long term.

However, even if you estimate it the correct way (i.e. based on the asset’s estimated service life), you should always re-evaluate these estimates of useful life on an ongoing basis.

If you don’t, you’re likely going to end up with many false calculations and errors in your books.

How to Account for Fixed Assets

Accounting for fixed assets can be completed in several different ways, depending on the setup of the businesses accounts.

Excel Templates – If you are using Excel templates manually adjust for the annual depreciation.

Fixed Asset Accounting Software – There is some specific asset accounting package, although this will have an additional cost.

Accounting Software – Enter a journal for the period of either a month or a year. If you are using XERO accounting software and set up all the fixed assets, the accounting software will calculate depreciation for you. Below is an example of fixed assets recorded in XERO accounts.

Xero Fixed Asset register example

Fixed Asset Accounting: Frequently Asked Questions

Lastly, we are just going to go over some frequently asked questions regarding fixed assets.

How Do You Calculate The Depreciation of Fixed Assets? 

You can calculate the depreciation of assets with these 3 steps for the straight-line method:

  1. Find the estimated useful life of your fixed asset.
  2. Estimate the depreciation based on the useful life i.e. if useful life is 4 years and cost is £1000, then depreciation is £250 per year
  3. Subtract the depreciation from the fixed asset to calculate the current netbook value.

What Is The Key Difference Between a Fixed Asset and an Expense? 

The key difference between a fixed asset and an expense is that a fixed asset helps you generate revenue, or in some cases, operate.

While a fixed asset may not always be the closest factor affecting your revenue, it is usually tied to it in some shape or form. For example, when purchasing a factory, this would be considered a fixed asset.

The factory that you purchase is needed to produce the inventory and therefore it is required in order to generate revenue. If you need a laptop to generate revenue, then the laptop becomes a fixed asset (assuming it meets the capitalisation policy).

Where Do You Track Your Fixed Assets? 

Fixed Assets are tracked in the balance sheet.

The depreciation of fixed assets is also shown as a cost in the profit and loss account.

Return from fixed asset accounting to fixed asset page.