Fixed assets are those assets that cannot be replaced and are not affected by economic or environmental factors. These assets can be equipment or machinery that are used on a daily basis. The fixed assets in a company are those assets that can’t be moved from one place to another.
Fixed asset accounting means an arrangement for maintaining the tangible assets of a firm. This is done by recording a fixed capital asset and a corresponding fixed earnings asset. The assets are then classified into three categories namely fixed assets, property and intangible fixed assets. Fixed assets include machinery, vehicles, furniture and computer systems.
The accounting records are then prepared based on the recorded fixed assets and liabilities. This would include the gross value, the income statement, the statement of cash flows and the statement of the balance sheet. In order to make the financial year end correct, all the transactions and activities in the financial year must be reported in the current or consolidated statement of cash flows. The balance sheet is prepared monthly, quarterly or annually and is used to show the condition of the firm as at the end of the reporting period. The balance sheet can be used to show the value of the firm’s tangible fixed assets and liabilities as at the end of the reporting period.
The accounting records of a firm are broken down into fixed assets and variable assets. Fixed assets include fixed capital assets like plant and machinery, construction materials like buildings and bridges and furniture. Variable assets include accounts receivable and accounts payable. It also includes the value of the services sold or the value of the goodwill.
Under common equity method, the value of the fixed assets are determined according to their present value and all the future valued values of the same are discounted to allow for depreciation. This is called the amortization factor and is used in computing the net worth of a firm. Under the cost method, the value of fixed assets is computed by using the cost of new plant and machines or construction materials or tools used in the operation of the business during one year. This method is usually adopted to obtain the replacement cost of fixed assets that may be long term and fixed assets purchased for less than their fair market value. Under the productivity method, the value of the fixed assets is computed by using one person’s productivity at a particular time, one year to eliminate the effect of inflation.
Fixed assets help in the smooth flow of cash-flow and profit in a firm. It also facilitates the allocation of resources between fixed assets and non-fixed assets. The turnover of firms is thus improved because of proper allocation of capital. Proper allocation of capital ensures that the firm maintains a growing economy with a healthy growth in income, output and employment rate. Fixed asset management helps in long run viability of the firm by reducing the effects of adverse market changes on the value of the fixed assets.
Fixed asset management systems help in decision-making in a firm. A good asset tracking system helps in the determination of asset value and helps in budgeting. Asset management systems are designed to track, store, assess, and account various fixed assets of a firm. This helps in the determination of the necessary purchases of inputs needed to maintain the performance of a certain firm. The performance of the firm can thus be evaluated over a period of time.
Accounting systems help in determining the net worth of the firm and its balance sheet. These assets include accounts receivable, accounts payable, inventory, fixed assets, and assets held by joint ventures. Components of an accounting system include collections, ledgers, balance sheets, and reports which summarize the information about the firm. Accounting systems make the financial reporting of a company transparent by classifying, measuring, reporting, and reporting the worth of the firm’s assets as net worth, gross value, or value of the equity (ownership percentage) and property (asset) on the balance sheet.