A fixed asset is an item having a useful life that spans multiple reporting periods, and whose cost exceeds a certain minimum limit (called the capitalization limit).
There are several accounting transactions to record for fixed assets, which are:
- Initial recordation. On the assumption that the asset was purchased on credit, the initial entry is a credit to accounts payable and a debit to the applicable fixed asset account for the cost of the asset. The cost of an asset can include any associated freight charges, sales taxes, installation fees, testing fees, and so forth. There may be a number of fixed asset accounts, such as:
- Furniture and fixtures
- Machinery and equipment
- Office equipment
- Depreciation. The amount of this asset is gradually reduced over time with ongoing depreciation entries. There are several variations on the depreciation calculation, but the most common approach is the straight-line method, where the estimated salvage value is subtracted from the cost, and the remaining amount is divided by the number of remaining months in the useful life of the asset. This yields a monthly depreciation charge, for which the entry is a debit to depreciation expense and a credit to accumulated depreciation. The balance in the accumulated depreciation account is paired with the amount in the fixed asset account, resulting in a reduced asset balance.
- Disposal. At the end of a fixed asset's useful life, it is sold off or scrapped. The entry is to debit the accumulated depreciation account for the amount of all depreciation charges to date, and credit the fixed asset account to flush out the balance associated with that asset. If the asset was sold, then also debit the cash account for the amount of cash received. Any residual amount needed to balance this entry is then recorded as a gain or loss on sale of asset.