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What Is Fixed Asset Accounting?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 13 March 2014
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    Conjecture Corporation
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Fixed asset accounting is a specific process that tracks the value and changes in the items a company uses to complete business processes. Fixed assets can include a variety of different items, such as computers, software, buildings, equipment, office décor or vehicles, among other items. A company often has a fixed asset accounting department to track these items, calculate depreciation and revalue the items as necessary according to standard accounting principles. Most companies create a set of internal guidelines to follow when accounting for the fixed assets within the company.

Almost all companies have or use fixed assets in their business operations. An important part of fixed asset accounting is to create a dollar limit at which a company will consider an item an asset, rather than an expense. This guideline is in the company’s standard accounting manual and should mirror the national accounting standard supplied by governing accounting bodies. Companies often set a limit of $500 or $1,000 US Dollars (USD) for recording fixed assets. Anything above this dollar limit is therefore an asset and not an expense. Most managers or employees fill out a form to request items recorded as an asset. Further approval is necessary to record the item as an asset in the accounting ledger.

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To record assets properly, accountants must value the item at book value or market value according to national accounting standards. Market value is typically used for buildings, vehicles, equipment or land; anything else is at the book value, which is the amount paid for by the company to acquire the assets. A second step to fixed asset accounting is to determine if the asset is depreciable. Again, national accounting standards will provide guidance for depreciable assets that the company should adhere to when creating an internal accounting policy. If depreciable, the fixed asset accountants set up a depreciation schedule for each qualified asset.

A company’s fixed asset accounting department is also responsible for managing the physical assets in a company. Accountants may need to conduct an inventory and physically view each fixed asset in the company’s accounting ledger. This process may be completed quarterly or annually, depending on the number of fixed assets in a company. The purpose of this is to ensure the asset is where it should be and in good working order. Assets no longer needed by the company are listed as a disposal entry in the accounting ledger and the company must then dispose of the asset.

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Discuss this Article

Mammmood
Post 4

@hamje32- I agree. I work for a small software company and if you ask me what the asset value of our software is, I will give you the answer in millions of dollars.

We don’t charge our customers millions, but that’s what the software brings in for us. For all intents and purposes, the software is the business; without it, we’re just a shell of a company.

Real assets earn revenue; it doesn't matter if the assets are brick and mortar or digital.

hamje32
Post 3

@allenJo - While I don’t know everything about how accountants tabulate the asset value of the software, I think they would take into account all of the revenue that the software brings in to ascertain its asset value.

If Microsoft sells Office for $400, I doubt that the accountants put $400 in the books for Office. They probably put down everything that the product is bringing in, the total annual sales derived from buyers of Office. That would make perfect sense in my opinion.

allenJo
Post 2

@SkyWhisperer - I’m sure that accountants use what customers are paying for the software to determine its fair market value. I believe that you are correct in your basic assumptions, however. I don’t think that you can take a piece of software and always compare it with another product to get an idea of its market value, like you would with a building or a piece of equipment.

SkyWhisperer
Post 1

The article says that software can be used as an asset (potentially) as well.

I’m not an accountant, but I would expect that things like software would present a unique challenge in fixed asset accounting.

How would you, for example, determine fair market value for a piece of software or decide if the software is subject to depreciation? Software is a completely digital product. It exists on a CD or a server or wherever. Somehow, that lack of tangibility in my opinion makes it more difficult to quantify.

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