What is a Fixed Asset? Basically, its anything you use in your business to produce income, with a life expectancy of greater than 1 year. Also known as PP&E, for Property, Plant and Equipment, they are tangible items used to produce your product or service - machinery, buildings, computers, etc. Fixed assets are not inventory held for resale, but for production, rental or administrative purposes. Additionally, the cost of the asset must be above the Capitalization Threshold, which is a discussed below.
Fixed Assets are Capitalized, not expensed. Capitalization means that instead of the cost of the assets going directly to expense and against your bottom line, the cost is set up as an asset in Fixed Asset Register, and depreciated over time. The length of time is the useful life of the asset. Many companies have set up a table of useful lives based on past experience with various types of assets. If you are a new company, a small company, or just completely unsure what asset life to use, go with the IRS tables, which are available on the IRS website. Whatever useful life you choose, just know that it must be consistent across that class of asset, i.e. all passenger automobiles must have the same asset life, but you could have a separate asset life for heavy trucks, as long as all heavy trucks use that asset life. There are several depreciation methods to choose from, but if you are still reading this, go with the IRS tables or use Straight Line. Straight Line depreciation simply divides the cost of the asset by the number of months in the useful life, and expenses that amount each month until the asset is fully depreciated.
Example: You buy a new pickup truck for your business at a cost of $24,000.
Your useful life for passenger trucks is 5 years.
To calculate your monthly depreciation expense,
$24,000/5 = $4800 per year, or $400 per month.
To be considered a Fixed Asset, the cost of the asset must be above your Capitalization Threshold, which can vary widely from company to company. Basically, the Capitalization Threshold is the amount above which an asset is capitalized and below which the asset is expensed. For a small company in a service industry, the Threshold could be as low as $100. For large corporations, it is usually $5,000 or more. It all depends upon the individual circumstances of your specific company. I strongly recommend putting your Fixed Asset Policy in general, and your Capitalization Policy in particular, in writing, and update it as your company grows.
Lastly, the Useful Life must be greater than 1 year. This means that software licenses, which are generally for a period of exactly 1 year, are not Fixed Assets and should not be capitalized. I have had many a discussion with IT Managers who, understandably, want to capitalize those high-cost licenses. They are not Fixed Assets, but may be Prepaid Assets, which will be discussed at a later time.
That's all for today. Thanks for reading!
Fixed Assets are Capitalized, not expensed. Capitalization means that instead of the cost of the assets going directly to expense and against your bottom line, the cost is set up as an asset in Fixed Asset Register, and depreciated over time. The length of time is the useful life of the asset. Many companies have set up a table of useful lives based on past experience with various types of assets. If you are a new company, a small company, or just completely unsure what asset life to use, go with the IRS tables, which are available on the IRS website. Whatever useful life you choose, just know that it must be consistent across that class of asset, i.e. all passenger automobiles must have the same asset life, but you could have a separate asset life for heavy trucks, as long as all heavy trucks use that asset life. There are several depreciation methods to choose from, but if you are still reading this, go with the IRS tables or use Straight Line. Straight Line depreciation simply divides the cost of the asset by the number of months in the useful life, and expenses that amount each month until the asset is fully depreciated.
Example: You buy a new pickup truck for your business at a cost of $24,000.
Your useful life for passenger trucks is 5 years.
To calculate your monthly depreciation expense,
$24,000/5 = $4800 per year, or $400 per month.
To be considered a Fixed Asset, the cost of the asset must be above your Capitalization Threshold, which can vary widely from company to company. Basically, the Capitalization Threshold is the amount above which an asset is capitalized and below which the asset is expensed. For a small company in a service industry, the Threshold could be as low as $100. For large corporations, it is usually $5,000 or more. It all depends upon the individual circumstances of your specific company. I strongly recommend putting your Fixed Asset Policy in general, and your Capitalization Policy in particular, in writing, and update it as your company grows.
Lastly, the Useful Life must be greater than 1 year. This means that software licenses, which are generally for a period of exactly 1 year, are not Fixed Assets and should not be capitalized. I have had many a discussion with IT Managers who, understandably, want to capitalize those high-cost licenses. They are not Fixed Assets, but may be Prepaid Assets, which will be discussed at a later time.
That's all for today. Thanks for reading!
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