Purchased Fixed assets can be created within the organization or purchased. The examples of fixed assets are stocked at warehouses, plant, or other appropriate locations. As the equipment, furniture and fixtures, machinery for your business. Generally, fixed assets are assets whose useful life exceeds one year.

As a fixed asset is in use, its value will decline over time of its useful life. An asset's useful life is the duration when it is used for your business. Depreciation is the process of allocating an asset's cost over the course of its useful life. Generally, fixed assets are assets whose useful life exceeds one year. The examples of fixed assets are equipment, machines, buildings, land. Also there are intangible assets, such as trademarks, copyrights, or goodwill that add value to your organization. Fixed assets can be created within the organization or purchased. Notice that generally most of tangible assets are depreciated except for land which that is never depreciated. Some of the intangible assets are not depreciated because they may have unlimited useful life lives with their value values not declining over time.

FirstBIT FirstBit ERP provides the functionality that allows you to accept account for the fixed assets from their purchase or construction to disposal.

Setting up the functionality

To enable the Asset Management module and the fixed asset accounting , perform depreciation (decrease in cost), and then dispose of the assets.
To start depreciation calculation, you must create a fixed asset, match it to an inventory item (produced or purchased) and accept the item to accounting as a fixed asset.

Accepting to Accounting

To add a new fixed asset to accounting, go to: Accounting > Fixed Assets> Fixed Asset Entries.

In the process of creating a Fixed Asset Entry document, you match the inventory item to a fixed asset master record or multiple records which you create on the fly.

You can create one fixed asset for specific quantity of the inventory item or you can create a fixed asset for each unit of the specified quantity of the item.

For the item, you can manually enter the cost in the Amount field. Notice that if the item was purchased by using a foreign currency, conversion to the accounting currency is performed automatically using the actual exchange rates of both currencies with respect to the national currency.

Then the cost can be distributed between the assets manually as required or automatically evenly between the listed assets. Use the automatically calculated the weighted average cost by clicking the button to the right of the Amount field. The system will use the available for the item purchasing documents to evaluate the unit cost.

For a new fixed asset, you must specify the following:

• Initial Cost
• Whether the asset will be depreciated
• Which depreciation method will be used: Straight Line or Units of Production.
• GL Accounts
• Business activity
• Expense Item

At any time, you can view the list of fixed assets and the accounting parameters by using the Fixed Assets master data.

Changing the Accounting Parameters for Fixed Assets

A fixed asset appears in the financial records at its net book value, which is its original cost, minus accumulated depreciation. The net book value of an asset is always declining.

However, under international financial reporting standards you can revalue a fixed asset, so that its net book value increases.

If you need to change the parameters of depreciation for a particular fixed asset, you can create a new Changes to Fixed Asset Accounting Parameters document. You can change any or all of the following parameters:

• Initial Cost
• Whether the asset will be depreciated
• Depreciation method
• GL Accounts
• Business activity
• Expense Item

New accounting parameters will be applied starting the month of the document date.

Using the Depreciate check box, you can stop depreciation for some period of fixed asset conservation. The asset will appear on the balance sheet, however, the depreciation will not be calculated, and the net book value will not be changed during this period.

Using the Straight Line Depreciation method

The key difference between amortization and depreciation is that amortization charges off the cost of an intangible asset, while depreciation does so for a tangible asset.

Another difference between the two concepts is that amortization is almost always conducted on a straight-line basis, so that the same amount of amortization is charged as expense in every reporting period.

To use the Straight Line depreciation method, you must specify the initial cost of the fixed asset and enter the number of months of useful life (how many months it must be depreciated).

You can choose to start the functionality, select the Enable Fixed Asset Accounting option on the Administration > Settings > Asset Management form.

If you need to use non-current asset classes, select the Enable Non-Current Asset Classes option on the same form.

To be able to calculate depreciation of fixed assets, select the Enable Depreciation of Fixed Assets option.

If you are going to use the Preparation for Fixed Asset Sale or Conservation of Fixed Assets documents and the corresponding functionality of fixed asset accounting, select the Enable Preparation for Fixed Asset Sale and Enable Conservation of Fixed Assets options, respectively.

If your organization is able to create fixed assets and needs to track construction costs, select the Enable Construction in Progress for Fixed Assets option.

If you select the Enable Capital Improvements to Fixed Assets option, the corresponding functionality will allow you to register any costs incurred while improvements are made to specific fixed assets and to revise accordingly their useful lives and gross costs.

For details, refer to Settings: Asset Management.

Fixed Asset Life Cycle and Statuses

Each fixed asset goes through several stages during its life: planning, acquiring, using, maintaining, and disposal. The statuses correspond the stages of fixed asset lifecycle. Some statuses are changed automatically on posting of specific documents, while other statuses can be changed manually.

Different documents are used to register different stages of fixed asset life cycle.

Brief descriptions of handling different stages are contained in the sections below. 

Planning Stage

Planning for new assets is the first stage of their life cycle. Asset managers need to identify particular business needs, budget restrictions, and perform market research. At this stage, it can be decided whether it is worth constructing or manufacturing the asset by the entity's own means.

Acquiring Stage

You can acquire a new fixed asset by purchasing or constructing. 

At this stage, you can create a master record for the fixed asset, for this go to: Asset Management > Master Data > Fixed Assets. Specify a unique identifier/ code, fixed asset type, and class of the asset. For more information, refer to Adding a Fixed Asset.  

By default, the fixed asset gets the New status. 

If you purchased fixed assets, you can register it as the purchase of new inventory items by creating an Invoice Received. You may need to create corresponding master records for these inventory items.

Deployment of some assets may involve delivery, assembling of the items, and training of the personnel. The costs of these services can be recorded using the Purchasing > Purchasing Documents > Additional Expenses documents.

If it is planned that the asset will be constructed, you can manually change the New status of the fixed asset to Construction in Progress. Costs of any materials and construction works must be recorded to Construction in Progress GL account. Once the fixed asset is ready to use, you can manually change the status to Construction is Completed.

Usage Stage

Once the fixed asset is ready for use, and have the Construction is Completed or New status, you can accept it for accounting and start depreciation. 

To add a new fixed asset to accounting, go to: Asset Management > Fixed Asset Documents > Fixed Asset Entries. In this document, for the specified fixed asset, you can list the inventory items that will be used as the fixed asset or specify only the construction costs if the fixed asset was constructed. 

A fixed asset may be composed of multiple inventory items. You can create one fixed asset for specific quantity of the inventory item, or you can create a separate fixed asset for each unit of the specified quantity of the item. For example, a fixed asset Conference Room Chairs may include multiple chairs used in a conference room. Alternatively, you can consider each chair as a separate fixed asset. Also, you can associate multiple items of different types with a single fixed asset. For example, a warehouse fixture may include multiple racks and shelves purchased separately.

Note. Accounting for the fixed assets is performed in the accounting currency. 

For the fixed asset, you need to specify the following parameters:

• Initial Cost: the total of all costs and additional expenses incurred when purchasing the items, transporting it to the premises, assembling, and adjusting.
• Salvage Value: the residual cost of the asset after usage.

To start depreciation calculation, you must select one of the supported depreciation methods:

• Straight Line and specify the Useful Life of the asset in months.
• Units of Production and specify the Estimated Production Volume.

Then, select the Depreciate check box to start depreciation in the month next to the month when the fixed asset was accepted to accounting – this is the default option. If you choose to start depreciation in the same month in which the asset was accepted to accounting, select the Depreciate in the Current Month option.

Then, during each month-end closing process, the depreciation expense which is equal to Initial Cost/ Useful Life (Months) will be posted. The depreciation calculation is not performed once the net book value becomes equal to 0.

Using the Units of Production Depreciation method

According to the Units of Production depreciation method, depreciation expenses are calculated proportionally to usage of the fixed asset which has a limited resource. Generally, this method is used when usage differs significantly from month to month.

For this depreciation method, you select the following parameters:

• UOM in which usage will be measured.
• Usage Limit which sets up the maximum usage recommended for the asset.

In a particular month, depreciation expense is calculated as follows:
Month Usage * (Initial Cost/Usage Limit)

and it is added to  Accumulated Depreciation.

The net book value is calculated as follows:
Net Book Value = Initial Cost - Accumulated Depreciation

You can use the Fixed Assets Output report to view the fixed asset usage.

The depreciation expense and accumulated depreciation amounts will be calculated during the Month-End Closing process. The depreciation calculation is not performed once the net book value becomes equal to 0.

Selling the Fixed Assets

Depreciation process continues until the net book value of the asset reaches the salvage value.

For detailed information, refer to Creating a Fixed Asset Entry.

On posting the document, the status of the listed fixed asset changes to Active.

During usage, the fixed asset cost is depreciated according to the selected for this asset depreciation methods and parameters. For more information, refer to Overview of Depreciation of Fixed Assets.

Maintenance and Capital Improvements Stages

Generally, depreciation is continuous and reflects expected wear and tear to fixed assets.

Reassessment

Periodically, business re-assesses their fixed assets for impairment. Over time, an asset's book value may become lower than the current market value (CMV) at which the asset could be sold, for instance due to unexpected damages. In some cases, the CMV of a specific asset may become higher than the book value. This means that its value on the balance sheet must be adjusted accordingly. In some countries, an organization cannot selectively apply revaluation to individual fixed assets. Instead, it must be applied to entire asset classes.

To register the results of reassessment, you can use the Changes of Fixed Asset Parameters document. Here, you can enter the revised Gross Cost, Salvage Value, and Useful Life.

Conservations

Fixed assets may need some preventive maintenance works to prevent damage or emergency repair over their useful lives. If the works require idle time measured in financial periods, you can initiate conservation of the fixed assets. Also, it may happen that you won't need to use specific assets some time for some reasons.

To register the fixed assets placed into conservation, you can create Conservations of Fixed Assets documents with the Start of Conservation transaction type, that are located as follows: Asset Management > Fixed Asset Documents > Conservations of Fixed Assets.

The fixed assets in conservation will appear on the balance sheet, however, the depreciation will not be calculated. The status of the fixed asset changes from Active to In Conservation.

To indicate that the fixed asset is again in use, you can create a Conservation of Fixed Assets document with the Cancellation of Conservation transaction type. Posting of this document changes the status from In Conservation back to Active.

The fixed asset, once conservation is cancelled, will be depreciated. The duration of useful life is not changed; however, it is just divided into the interval before conservation and the interval after cancellation of this conservation. The depreciation calculation will be resumed. For more information, refer to Conservations of Fixed Assets.

Capital Improvements

If you decide to make capital improvements to a fixed asset, that is, to replace the significant parts with parts with higher efficiency characteristics or perform other essential works, necessity to place the asset in conservation may depend on how long the fixed asset will be out of use.

Generally, improvements could extend the useful life and increase the gross cost of the asset. You can record the costs of improvements using various documents - you only need to record these costs to the Capital Improvements GL account and associate them with particular fixed asset selected as cost object. Then, you can capitalize the costs of these improvements and register changes in other parameters by creating a Capital Improvements to Fixed Assets document. For details, refer to Capital Improvements to Fixed Assets.

Also, in this document you can calculate the current depreciation using the "old" parameters if needed.  If the asset was in conservation during the capital improvement works, you will need to cancel the conservation once the works are completed. After that, you will be able to calculate depreciation with the revised parameters resulted from capital improvements made to the asset.

Disposal

Disposing of the fixed asset represents the final stage of the asset's life cycle in your organization. Disposal can be done by selling or writing off.

Disposal by Sale

Generally, when the asset net book value reaches the salvage value, the asset is sold for a salvage value which is the asset's estimated value if it were broken down and sold in parts.
However, some fixed assets can be sold for a higher price or earlier than at the planned end of their useful life. After some period of fixed asset usage, the organization may decide to sell the asset. The sales may require the recording of a gain or loss on the transaction in the reporting period when the sales occurs

If you need to make specific preparations before you can sell the fixed assets, you create a Preparation for Fixed Asset Sale document which involves moving the fixed asset from the balance sheet to a specific GL account (by default, Held for Sale). On posting the document, the asset's status changes to Held for Sale, and depreciation is not calculated.

Sales of fixed assets are registered by creating the following documents: Accounting > Fixed Assets > Fixed Asset Sales documents. For details, refer to to Fixed Asset Sales. If you used Preparation for Fixed Asset Sale, then you will be able to generate a Fixed Asset Sale document based on the Preparation for Fixed Asset Sale document.

At the period of sales, the asset's net book value is the difference between the initial cost Gross Cost and the accumulated depreciation.

Note. If the sale occurs before the end of the month date, you can manually run the depreciation calculation for the current month by clicking the Calculate Depreciation button on the toolbar of the Fixed Asset Sales Sale (create) form.

The Fixed Asset Sales document assigns the Disposed status to the asset. Any difference between the proceeds from sales and the fixes asset's residual net book value is recognized as either a gain or a loss.

Sale transaction debits the cash account (or Receivables) for the amount received, debits the Accumulated Depreciation account, credits the Fixed Asset account and debits/credits the Fixes Asset Sales account.

Example
The organization purchased a machine with useful life of 5 years for $4000 on June 1, 2015. The machine was depreciated by using the linear depreciation method, each year by $800. Then, the organization decided to sell the asset on June 2018 for $3000 in order to raise cash for the purchase of a new machine. At the moment of sale, the net book value of the machine is 1600.

The sale transaction generates the following journal entries:

...

GL Account

...

Debit

...

Credit

...

Accumulated Depreciation

...

2400

...

Fixed Asset

...

4000

...

Receivables

...

3000

...

Fixed Asset Sales

...

(3000-1600) = 1400

Writing off the Fixed Assets

Disposal by Write off

In some cases, the fixed asset may become obsolete and will, therefore, be disposed of (discarded or recycled) without receiving any payment in return.

A fixed asset is written off when it is determined that there is no further use for the fully depreciated asset, or if the asset is disposed of without receiving any payment in return or damaged before it was fully depreciated. A writeoff involves removing the fixed asset from the balance sheet, that is, from GL accounts, becomes obsolete and is of no use, significantly damaged, or by other reasons. Either way, the fixed asset is written off the balance sheet as it is no longer in use by the organization.

Write offs of fixed assets are registered by creating the following documents: Accounting Asset Management > Fixed AssetsAsset Documents > Fixed Asset Write Offs. For details, see 

The Fixed Asset Write Offs.

A fixed asset write off involves reversing of both the recorded cost of the fixed asset and the corresponding amount of accumulated depreciation. Any remaining difference between the two is recognized as either a gain or a loss. Proper fixed asset write offs ensure that the balance sheet correctly reflects the assets actually owned by the entity.

Here are the options for accounting for the disposal of assets:

If the asset is fully depreciated, write off debits all accumulated depreciation and credits the fixed asset GL Accounts.

Example

The organization purchased a woodworking machine with useful life of 4 years for $2000 on June 1, 2015. The machine was depreciated by using the linear depreciation method during 3 years and 6 months. Then, the machine was damaged beyond repair. The organization wrote off the machine. At the moment of write off, the net book value of the machine was 1750.

The write off document generates the following journal entries:

...

GL Account

...

Debit

...

Credit

...

Accumulated Depreciation

...

1750

...

Fixed Asset

...

2000

...

Expense

...

250

...

Off document assigns the Disposed status to the listed fixed assets.

If the asset is written off before it is depreciated down to the Salvage value, the current month depreciation expense is calculated as the Net Book Value - Salvage Value. If the Accumulated Depreciation is greater than the Gross Cost, the difference is recorded as a gain. For more information, refer to Fixed Asset Write Offs.

Viewing the documents related to a fixed asset

To find all the documents related to a particular fixed asset, go to: Accounting Asset Management > Master Data > Fixed Assets > , locate the fixed asset master record, open it, and click the Fixed Asset Documents. Using this form link on the top. Then, you can filter view all the fixed asset documents by document type, particular available documents related to this fixed asset or both. Also, you can search the document by inventory number or a string in the fixed asset description.  For more information, see Fixed Asset Depreciation documentsDocuments.

...

Viewing information on the fixed assets in reports

Your organization must show both tangible and intangible assets on your balance sheet, with tangible assets listed first. For details, refer to to Financial Statements.

For managing accounting of fixed assets, you can use the following reports in the Accounting Asset Management module:

• Inventory Card: Using this report, you can view the net book values of fixed assets with some Statement of Depreciation: The report lists the fixed assets grouped by department with the details of depreciation. You can filter the data by entity, status, department, and specific fixed assetsasset.
• Fixed Assets OutputBalances of Capital Improvements Costs: The report lists the fixed assets with the Units of Production depreciation method. For each such fixed asset, the output in the specified units of production during the selected period is shown.Statement of Depreciation: The report lists the fixed assets grouped by department with the details of depreciation. You shows the costs of capital improvements on the specified date listed by fixed asset and expense item. You can filter the data by entity, fixed asset, or expense item.
• Balances of Construction in Progress Costs: The report shows the costs of of fixed asset construction in progress on the specified date listed by fixed asset and expense item. You can filter the data by entity, fixed asset, or expense item.
• Costs of Capital Improvements to Fixed Assets: The report shows how the capital improvement costs changed during the specified period for the fixed assets. Expense items reflect the structure of costs. You can filter the data by entity, fixed asset, or expense item.
• Costs of Fixed Asset Construction in Progress: The report shows how these costs changed during the specified period for the fixed assets under construction. Expense items reflect the structure of costs.  You can filter the data by entity, department, and specific fixed assetsfixed asset, or expense item.

For more information on details, refer to Accounting Asset Management: Reports.