In business, an asset is defined as resources owned by a company that has economic value and is used to generate profit. A fixed asset is any form of asset that cannot be easily turned into cash. Examples of fixed assets include:
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Buildings.
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Land.
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Vehicles.
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Furniture and fixtures.
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Equipment.
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Machinery.
One of the most expensive aspects of running a business is the purchase and maintenance of fixed assets. Because of the expense involved it is important that a business has procedures in place for recording each asset, tracking its depreciation, and also notating its disposal.
A fixed asset register is a record or report that holds the comprehensive details of any fixed assets that a company owns. It may be manual or computerised and will assist the business to undertake stocktakes, determine current book value, provide a reference for various values in the balance sheet, and provide information about the supplier of the item which might be useful for maintenance and warranty purposes.
The details that are recorded include:
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Description. This should include the make and/or model of the asset if applicable.
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The serial number or asset ID.
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Location of the asset within the business. For example, the Accounts Department or Warehouse.
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Date purchased.
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Purchased amount.
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Supplier company name and possibly their contact details.
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Depreciation method.
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Rate of depreciation.
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Its current book value.
Here is an example of a fixed asset register:
| Fixed Asset Register | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Organisation: Brentwood Landscaping | ||||||||||
| Address: 512 Lutwyche Road, WINDSOR, QLD, 4030 | ||||||||||
| Date: 30th Jun 2020 | ||||||||||
| Asset Description | Serial Number | ID Number | Location | Purchase Date | Purchase Amount | Supplier | Depreciation Method | Rate of Depreciation | Current Value | Notes |
| Laptop (Dell) | A402J9 | #101 | Accounts dept | 1st Apr 2018 | $3,000 | Good Guys | Straight | 33% | $2,500 | |
| Photocopier | JKE56KL | #86 | Reception | 15th Aug 2017 | $15,000 | Office Works | Straight | 33% | $12,000 | |
| Mitsubishi Ute | TKD294 | #27 | Equipment Garage | 18th Sep 2016 | $22,000 | Brisbane Mitsubishi | Reducing | 33% | $6,672.32 | |
| Samsung Mobile | 92aoP_12 | #25 | Manager | 18 Dec 2015 | $2,500 | JB HiFi | Straight | 33% | $800 | |
| Bobcat | S70 | #8 | Equipment Garage | 12 Oct 2015 | $25,000 | Hastings Deering | Straight | 20% | $1,450 | |
Separately any fixed assets that are sold or disposed of must also be recorded. This information must include:
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Description.
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The serial number or asset ID.
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Purchase date.
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Disposal date.
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Disposal method. For example, by sale, theft, or write off.
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Value of disposal.
Here is an example of a fixed asset disposal register:
| Fixed Asset Disposal Register | |||||||
|---|---|---|---|---|---|---|---|
| Organisation: Brentwood Landscaping | |||||||
| Address: 512 Lutwyche Road, WINDSOR, QLD, 4030 | |||||||
| Asset Description | Serial Number | ID Number | Purchase Date | Disposal Date | Disposal Method | Value of Disposal | Notes |
| Ford Ute | UKQ926 | #21 | 1st Jul 2013 | 17th Sep 2014 | Write Off | $0 | Vehicle damaged in an accident. |
| Samsung Mobile | 92ksP_3 | #18 | 14th Aug 2012 | 18th Dec 2013 | Sold | $350 | Traded in for a newer model. |
Depreciation is a method of computation to 'write off' the value of a fixed asset over the effective life, therefore, creating a business expense. In order for depreciation to be effective, the business must ensure it is applied consistently across all assets and in line with general rules of depreciation in terms of tax guidelines.
When considering an asset's effective life the following factors should be considered:
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Frequency of use.
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Wear and tear.
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Maintenance that has been undertaken.
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Manufacturer's information regarding the expected life of the product.
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Prior experience with a similar asset.
There are two common methods used to calculate depreciation of assets:
This method assumes that the value of the depreciating asset decreases evenly over its useful life.
According to the Australian Taxation Office (ATO) the formula for calculating straight-line depreciation is:
Asset's cost x (days held / 365) x (100% / asset's effective life).
Note: Days held is the number of days the asset is used in an income year. Adjust the formula to 366 days for leap years.
An example of straight-line depreciation is as follows:
Brentwood Landscaping buys a new bobcat for $25,000 and it is expected that this piece of equipment will have an effective life of five years. At the end of this period, it is expected that the bobcat will be worth approximately $1,000.
Brentwood Landscaping will be able to depreciate the asset at a rate of 20% per year this means $5,000 for every full year of ownership. Note: If the item is bought or disposed of partway through the year then the days held amount of the below calculation must be adjusted accordingly.
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$25,000 x (365 / 365) x (100% / 5)
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$25,000 x 1 x 20% = $5,000
This method assumes that the value of the depreciating asset decreases more during its early years of useful life.
According to the Australian Taxation Office (ATO) the formula for calculating reducing balance depreciation is:
Base value x (days held / 365) x (200% / asset's effective life).
An example of reducing balance depreciation is as follows:
Brentwood Landscaping buy a utility vehicle (ute) valued at $22,000 and estimate it will have an effective life of six years. The claim for the first year will be:
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$22,000 x (365 / 365) x (200% / 6)
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$22,000 x 1 x 33% = $7,260
The base value reduces each year by the decline in the value of the asset. This means the base value for the second year will be $14,740. The new formula for the second year depreciation will be.
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$14,740 x (365 / 365) x (200% / 6)
Note:
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$14,740 x 1 x 33% = $4,864.2
The base value for the third year will be $9,875.80, this pattern is repeated for each of the five years of the asset's effective life. Note: If the item is bought or disposed of partway through the year then the days held amount of the above calculation must be adjusted accordingly.
