Episode 019 – Fixed Assets and Depreciation
Recorded: April 13, 2022
Released: April 13, 2022
Intro by Clive Castle
Sounds by ZapSplat
Fixed Assets and Depreciation go hand in hand. Fixed assets are the durable, long-living assets such as equipment, vehicles, building, and land that a business has at its disposal to help generate revenue. Depreciation is how we account for wear and tear over time and calculate the book value of a fixed asset. Find the transcript of this episode below.
Hello and welcome back to The Better Bookkeeper Podcast. I am your host, Patrick Donovan, President of Cape May Counting House. Thank you for joining me today as I talk about fixed assets and depreciation. If you would like to see the transcript of today’s episode please visit thebetterbookkeeper.com/019. You can also follow our Facebook page to leave a comment or question at www.facebook.com/thebetterbookkeeper.
One other thing, you may have heard our big announcement. If not, let me fill you in. The Better Bookkeeper has now expanded into offering online bookkeeping courses. Our first one is called Bookkeeping Fundamentals and you can learn more at courses.thebetterbookkeeper.com. If you are interested in taking the course, please use coupon code HALFOFF to get this course for 50% off.
Now, let’s get back to the podcast. As I mentioned, the topic of this episode is Fixed Assets which are basically durable, long-living assets such as office equipment, office furniture, company-owned vehicles, buildings, and land. These are sometimes classified under the heading of Property, Plant, and Equipment or PPE on the Balance Sheet. These are all considered tangible assets because they are physical assets. There are also other types of long-term assets that are considered intangible assets because there is no physicality to them such as patents, copyrights, trademarks, and goodwill. It’s important to know what they are and how to properly account for them in the bookkeeping records. So, let’s get into it.
One of the items that a business has at its disposal to help generate revenue is fixed assets. This could be office equipment such as computers and printers, it could be the display cases or shelving in your retail store. Fixed assets could also be the machinery in your factory. Company-owned vehicles, buildings, and land also get included. Needless to say, these are not small-dollar items that you would normally just expense off when they are purchased. Fixed assets are usually high-dollar items that make up a sizable amount of your assets. Fixed assets get capitalized in the books, meaning that they get recorded at their original price and that price gets expensed at a predetermined frequency over time, called depreciation.
Entering fixed assets into the books is not difficult. Whatever costs are associated in acquiring those assets, having them delivered, installing them, and preparing them for use are included in the cost that you enter into the books. This is known as the historical cost. That figure will appear on your balance sheet because fixed assets appear on the balance sheet. Typically, fixed assets are added through a journal entry where you would debit Fixed Assets or if you have a more specific subcategory in your chart of accounts. The credit would be to cash or a bank account if you purchased them in full or to accounts payable if you will pay for them over time.
Now, as time goes on, these fixed assets begin to experience wear and tear. They are getting older and they may not work as efficiently as when they were new. Because their value decreases over time, that must be reflected in the books. That is where depreciation comes in.
IRS Publication 946 explains how to depreciate property so for more information please review that document. Depending upon the type of fixed asset in question, there are different time frames over which you can depreciate property. There are also different methods allowed for depreciating property and you should speak with your tax professional to decide which way is best for your specific situation. The Better Bookkeeper Podcast does not provide accounting, legal, or tax advice.
To be sure that you are allocating depreciation expense against your fixed assets, it should be recorded for each accounting period. You don’t want to allocate depreciation expense all at year end because that will show an entire year’s worth of depreciation all at the end of your fiscal year. However, that fixed asset depreciated over the course of the year so depreciation expense should be allocated in each period to give a more accurate rendering of this expense.
Each time that you allocate depreciation expense, it builds up in the Accumulated Depreciation account which is a contra account to Fixed Assets. This is important to remember because once you enter the fixed asset into the books, the value doesn’t change. Your fixed assets will show the historical cost. If depreciation is never charged then 10 years from now, the value of your fixed assets will remain the same. It is the contra account Accumulated Depreciation that will offset the value in Fixed Assets and allow the calculation for Fixed Assets, net of depreciation. This will show the book value of Fixed Assets (Historical Cost – Accumulated Depreciation). So you really need to stay on top of your depreciation to make sure that your Fixed Assets are not overstated. If you don’t allocate depreciation, key metrics that investors and lenders look at will be skewed and that could cause a liability for you or even get you turned down for a loan.
One more thing. We have been talking about depreciation for tangible fixed assets. In the introduction to this episode we also mentioned intangible fixed assets such as patents and copyrights. These basically get handled the same way but we don’t depreciate these assets per se, intangible fixed assets are amortized. For this too, review IRS Publication 946.
And that, is that. I hope that you found this episode about fixed assets helpful. I also hope that you will make use of it in your business or that of your clients to provide additional value. In the end, that’s what it’s all about, the value you bring to the table.
Just as a reminder, if you are interested, please check out our online courses at courses.thebetterbookkeeper.com and get 50% off with coupon code HALFOFF. Thank you for listening!