Fixed asset procedures

The Asset Recognition Procedure

One of the areas in which a procedure can be quite useful is for the initial recognition of a fixed asset in the accounting system, since this is a relatively complicated transaction.

The procedure for completing the asset recognition process is outlined below:

  1. Determine base unit. Determine the base unit for the asset. This determination is based upon a number of factors, such as whether the useful lives of various components of the asset are significantly different, at which level you prefer to physically track the asset, and the cost-effectiveness of tracking assets at various levels of detail.
  2. Compile cost. Compile the total cost of the base unit. This is any cost incurred to acquire the base unit and bring it to the condition and location intended for its use. These activities may include the construction of the base unit, purchase costs, and related administrative and technical activities.
  3. Match to capitalization limit. Determine whether the total cost of the base unit exceeds the corporate capitalization limit. If it does not, then charge the expenditure to expense as incurred. Otherwise, continue to the next step.
  4. Assign to asset class. Assign the base unit to the most appropriate asset class for which there is a general ledger category (such as furniture and fixtures, office equipment, or vehicles).
  5. Create journal entry. Create a journal entry that debits the asset account for the appropriate asset class and credits the expenditure account in which the cost of the base unit had originally been stored.

The Fixed Asset Record Creation Procedure

The exact types of information recorded for a fixed asset will vary by business, which means that the following procedure may need to be adjusted. The following sample procedure is intended for the recordation of a manufacturing asset.

  1. Create record. Create a new record for the asset and assign the next sequential record number to it. If being recorded in a computer system, the software will assign the record number. If not, the fixed asset accountant will do so.
  2. Write a description. Describe the asset in one sentence. If this asset is similar to other company assets, use the same description format. Otherwise, consider using a manufacturer-provided description.
  3. Enter tag number. List the number on the company-provided tag (if any) affixed to the equipment. If no tag was used, enter “No Tag.”
  4. Enter serial number. Enter the manufacturer-provided serial number on the equipment. If you cannot find the serial number, contact the manufacturer to find out where it should be located. If there is no serial number, enter “No Serial Number.”
  5. Note asset location. Note the location of the asset. Where possible, specify the location at least by building, and preferably by room. If it is located in the production area, specify the work center in which it is located.
  6. Assign responsibility. State the name or at least the position title of the person who is responsible for the asset.
  7. Record the acquisition date. State the month and year on which the asset was ready for its intended use, and whether it was actually used as of that date.
  8. Enter cost. Enter the total initial capitalized cost of the asset. This should match the amount recorded in the general ledger or fixed asset journal for the asset. Do not use the amount listed on the supplier invoice, since other costs may have been added. This step assumes that the fixed asset software is not having information interfaced directly to it from the general ledger or fixed asset journal.
  9. Assign to asset class. Assign the asset to an asset class by comparing its characteristics to the standard asset classes used by the company. If in doubt, review related assets to determine the classes to which they were assigned. This is an important step, since useful lives and depreciation methods are frequently assigned automatically, based on the asset class.
  10. Enter useful life. If the system does not automatically assign a useful life based on the asset class, state the useful life.
  11. Approve record. Have the controller review and approve the file. Correct any issues noted by the reviewer.
  12. Store the record. If the information is recorded in an entirely manual system, store it by asset class and then by record number in the fixed asset record files.

The Depreciation Procedure

There should be a detailed depreciation procedure that specifies exactly how to categorize each fixed asset and how to depreciate it based on the asset class to which it is assigned. The basic procedure is:

  1. Assign an asset class. Match the fixed asset to the company’s standard asset class descriptions. If you are uncertain of the correct class to use, examine the assets already assigned to the various classes, or consult with the controller.
  2. Assign depreciation factors. Assign to the fixed asset the useful life and depreciation method that are standardized for the asset class of which it is a part. This is automatically assigned in some computerized systems, where the assignment of an asset class automatically assigns a useful life and depreciation method to an asset.
  3. Determine salvage value. Consult with the purchasing or industrial engineering staffs to determine whether the asset is expected to have a salvage value at the end of its useful life. If this salvage value exceeds the company’s policy for minimum salvage values, make note of it in the depreciation calculation.
  4. Create depreciation calculation. Create the depreciation calculation based on the useful life and depreciation mandated for the asset class using the asset cost less any salvage value. This is done automatically for assets entered into a fixed asset software package, but must otherwise be generated manually.
  5. Print depreciation report. Print the depreciation report, sorted by asset class.
  6. Create journal entry. Create the monthly depreciation journal entry, using the standard depreciation template. The standard entry is to record a debit for the depreciation expense (in total or by department), and to record a credit to the accumulated depreciation account for each asset class. This information comes from the totals on the depreciation report.
  7. Enter the transaction. Record the journal entry in the accounting software.
  8. File backup materials. Attach the depreciation report to the journal entry form and file it in the journal entries binder.

The Interdepartment Transfer Procedure

If fixed assets are routinely shifted between departments, there should be a procedure that ensures the related records are updated. The procedure steps are:

  1. Complete a form identifying which asset is being transferred out of a department. This should include the unique asset tag number and a general description of the asset. The manager of this department signs the form to acknowledge that the asset is to be shifted elsewhere.
  2. The manager of the department receiving the asset also signs the form, to acknowledge receipt.
  3. Forward the form to the fixed asset accountant, who accesses the asset record in the accounting system and assigns the asset to the receiving department. The accountant also shifts the related depreciation charge to the receiving department.
  4. Send copies of the form to both department managers, for their records.