The 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.
