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Companies need financial assets to operate and survive in the long run. Most companies focus on working capital, including liquid assets that help run daily operations. However, that does not imply non-liquid resources do not play a role in activities. Companies also need long-term assets that help provide the base for running operations. These may fall under fixed assets.
What are Fixed Assets?
Fixed assets are resources that companies use to build a base for operations. Usually, these include long-term assets that companies use to generate revenues and profits. Fixed assets are tangible and have a useful life of over 12 months. In accounting, these assets fall under non-current assets in the balance sheet. Similarly, these assets fall under IAS 16 Property, Plant, and Equipment.
Fixed assets may include various resources, for example, land, buildings, plant, equipment, vehicles, etc. Companies keep these assets for a long time and serve as a base for operations. Usually, companies acquire fixed assets expecting long-term economic benefits. Sometimes, companies also use the term non-current asset to denote these assets.
What is the accounting for Fixed Assets?
The accounting for fixed assets occurs in various stages. The first is when a company recognizes these assets in its books.
Recognition
When a company acquires fixed assets, it must recognize them in its records. The accounting at this stage occurs at cost and includes various elements of the acquisition transaction. Usually, these consist of the purchase price, import duties, and non-refundable taxes. Furthermore, companies must add any costs directly attributable to bringing the asset to its location and condition.
Post-recognition
The next stage in accounting for fixed assets is when the company uses them. At this stage, companies can also use the revaluation model to evaluate those assets after regular intervals. Another element of this stage includes charging depreciation of the fixed asset. Companies must also ensure to record any impairment that occurs to those assets as well.
Derecognition
When a fixed asset reaches the end of its useful life, the company must derecognize it. Sometimes, this stage also occurs before that if the asset has been disposed of or is completely impaired. The company must estimate the gains or losses from the derecognition and record them in the profit or loss account. This amount will equal the difference between the net disposal proceeds and the asset’s carrying value.
What is the journal entry for Fixed Assets?
The journal entry for fixed assets differs depending on the current stage of its life. At recognition, companies must record the acquisition using the criteria mentioned above. Consequently, the journal entry will be as below.
| Dr | Fixed asset |
| Cr | Cash or bank or payables |
After recognition, companies must record depreciation on the asset. The journal entry for it is as below.
| Dr | Depreciation |
| Cr | Accumulated depreciation |
At derecognition, the company must use the net proceeds to determine the gain or loss. If no sale has occurred, these proceeds will be zero. The journal entry for derecognition is as below.
| Dr | Sale proceeds |
| Dr | Accumulated depreciation |
| Dr | Loss on asset |
| Cr | Fixed asset |
| Cr | Gain on asset |
Companies can remove any parts of the above journal entry that do not apply to the transaction.
Conclusion
Fixed assets are long-term resources companies use to run operations and generate income. Usually, they have a useful life of over 12 months and fall under the non-current asset portion in the balance sheet. The accounting for fixed assets includes various stages and falls under IAS 16 Property, Plant, and Equipment.
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