The proper classification of fixed assets
/When to Classify an Asset as a Fixed Asset
When assets are acquired, they should be recorded as fixed assets if they meet the following two criteria:
Have a useful life of greater than one year; and
Exceeds the corporate capitalization limit.
The capitalization limit is the amount of expenditure below which an item is recorded as an expense, rather than an asset. For example, if the capitalization limit is $5,000, then record all expenditures of $4,999 or less as expenses in the period when the expenditure is recorded.
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Fixed Asset Classification Criteria
If an asset meets both of the preceding criteria, then the next step is to determine its proper account classification. The most common classifications used are noted below.
Buildings
The buildings account may include the cost of acquiring a building, or the cost of constructing one (in which case it is transferred from the Construction in Progress account). If the purchase price of a building includes the cost of land, apportion some of the cost to the Land account (which is not depreciated).
Computer Equipment
The computer equipment account can include a broad array of computer equipment, such as routers, servers, and backup power generators. It is useful to set the capitalization limit higher than the cost of desktop and laptop computers, so that these items are not tracked as assets.
Construction in Progress
The construction in progress account is a temporary one, and is intended to store the ongoing cost of constructing a building; once completed, shift the balance in this account to the Buildings account, and start depreciating it. Besides the materials and labor required for construction, this account can also contain architecture fees, the cost of building permits, and so forth.
Furniture and Fixtures
The furniture and fixtures account is one of the broadest categories of fixed assets, since it can include such diverse assets as warehouse storage racks, office cubicles, and desks.
Intangible Assets
The intangible assets account includes non-physical assets, examples of which are trademarks, customer lists, literary works, broadcast rights, and patented technology.
Land
Land is the only asset that is not depreciated, because it is considered to have an indeterminate useful life. Include in this category all expenditures to prepare land for its intended purpose, such as demolishing an existing building or grading the land.
Land Improvements
Land improvements include expenditures that add functionality to a parcel of land, such as irrigation systems, fencing, and landscaping.
Leasehold Improvements
Leasehold improvements are improvements to leased space that are made by the tenant, and typically include office space, air conditioning, telephone wiring, and related permanent fixtures.
Office Equipment
The office equipment account contains such equipment as copiers, printers, and video equipment. Some companies elect to merge this account into the Furniture and Fixtures account, especially if they have few office equipment items.
Software
The software account includes larger types of departmental or company-wide software, such as enterprise resources planning software or accounting software. Many desktop software packages are not sufficiently expensive to exceed the corporate capitalization limit.