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    Managing Fixed Assets

    [fa icon="clock-o"] Mar 5, 2020 3:11:00 PM [fa icon="user"] Cheryl Coyle [fa icon="folder-open'] Budgeting, Bookkeeping, Accounting

    asset depreciationThe question many of our small business owners have is how to manage fixed assets. Here we walk you through identifying which assets are fixed, and then an example of depreciating a vehicle.

    First let’s consider what a fixed asset is.

    To be considered a fixed asset, the item must:

    • Have a useful life greater than one year
    • Be depreciable - excluding land, fixed assets face deprecation to reflect wear and tear of use
    • Be used in business operations and provide long-term financial gain – think something used to produce goods or services that are not sold to customers such as delivery equipment, tools, furniture.
    • Not be liquid – a fixed asset is not easily converted to cash

    Now that you know how to identify fixed assets, you need to understand how to manage them. Using an example of a truck purchase we will go through the required steps to properly present the purchase on the balance sheet.

    Example - Purchase of a Pickup Truck

    Cost $50,000
    Useful Life 5 Years (60 Months)
    Placed in Service 6/1/2019

    Using accrual-based accounting, you would record the transaction as:

    JE #
    Date
    Account
    Debit
    Credit
    1
    6/1/2019
    Vehicles (Asset Account)
    50000
     
     
     
    Cash (or A/P or Loan)
     
    5000
     
     
    To record purchase of pickup
    2
    6/1/2019
    Depreciation Expense
    833.33
     
       
    Accum Deprecation Vehicles (Contra Asset Acct.
     
    833.3
       
    To record monthly depreciation expense (50,000/60 = 833.33)
    3 through 8
     
    Record journal entry #2 every month for the rest of the year

    Recap: End of 2019

    Balance Sheet at 12/31/19
    Vehicles 50000
    Accum. Depr. Vehicles (5,833.31)
    Net Book Value 44,166.69
    Profit & Loss on 12/31/19
    Depreciation Expense 5833.31

     

    JE #

    Date

    Account

    Debit

    Credit

    9 1/1/2020 Depreciation Expense 833.33  
        Accum. Depr. Vehicles (Contra Asset Acct)   833.33
        To record monthly depreciation expense (50,000/60 = 833.33)
    Pickup is SOLD on 2/15/2020 for $40,000
    10   Depreciation Expense 416.67  
        Accum. Depr. Vehicles (Contra Asset Acct)   416.67
        To record 1/2 month of depreciation expense
          40,000  
    11   Cash 0  
        Accum. Depr. Vehicles (833.33*8.5) 7,083.31  
            50,000.00
        Vehicles   0
        Loss of Sales of Fixed Assets 2916.70  
        To record sale of vehicle    

    Recap: End of 2020

    Balance Sheet at 12/31/20
    Vehicles 0.00
    Accum. Depr. Vehicles -
    Net Book Value 0.00
    Profit & Loss on 12/31/20
    Depreciation Expense 1250.00
    Gain/{Loss} on Sales of Fixed Assets 2916.70

    Why It is Important to Correctly Manage Fixed Assets?

    Properly accounting for fixed assets is crucial to small business. In addition to being used to help generate revenue, fixed assets are closely looked at by investors when deciding whether to invest in a company.
    Contact us at www.budgetease.biz to find out how we can help you manage your fixed assets.

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    Cheryl Coyle

    Written by Cheryl Coyle

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