Accounting for fixed assets, natural resources, and intangible assets part I

Introduction

This tutorial provides a step-by-step guide to accounting for fixed assets, natural resources, and intangible assets. It focuses specifically on the acquisition and depreciation of fixed assets, which are essential for businesses to track their resources and manage finances effectively.

Step 1: Understanding Fixed Assets

• Definition: Fixed assets are long-term tangible assets used in the production of goods and services. Examples include machinery, buildings, and vehicles.
• Importance: They are crucial for the operation of a business and can significantly impact financial statements.
• Classification: Fixed assets can be classified into:
  • Tangible assets (physical items)
  • Intangible assets (non-physical items)
  • Natural resources (extraction-based assets)

Step 2: Acquiring Fixed Assets

• Purchase Process:
  • Identify the need for a fixed asset.
  • Evaluate different options and suppliers.
  • Negotiate terms and finalize the purchase.
• Recording the Acquisition:
  • Record the asset at its purchase price, including any costs necessary to prepare the asset for use (e.g., installation, shipping).
  • Use the following journal entry format:

    Debit Fixed Asset Account
    Credit Cash/Accounts Payable
    

Step 3: Depreciating Fixed Assets

• Definition of Depreciation: Depreciation is the systematic allocation of the cost of a fixed asset over its useful life.
• Methods of Depreciation:
  • Straight-Line Method:
    • Formula:

      Annual Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
      

    • Consistent expense each year.
  • Declining Balance Method:
    • Accelerated depreciation based on the asset's book value.
    • Useful for assets that lose value quickly.
• Recording Depreciation:
  • Each year, make the following journal entry:

    Debit Depreciation Expense
    Credit Accumulated Depreciation
    

Step 4: Monitoring Fixed Assets

• Regular Review:
  • Regularly assess the condition and usage of fixed assets.
  • Consider impairment tests for assets that may have lost value.
• Adjustments:
  • If an asset is sold or disposed of, adjust the accounts accordingly and recognize any gain or loss from the transaction.

Conclusion

In this guide, we covered the basics of accounting for fixed assets, focusing on acquisition and depreciation. Understanding these concepts is critical for accurate financial reporting and asset management. As a next step, consider reviewing your company’s fixed asset policy and determining the appropriate depreciation method for each asset. This foundational knowledge will enhance your accounting skills and improve financial oversight in your business operations.