Using the Fixed Asset Register
What is a Fixed Asset Register?
Most entities will use some fixed assets in their day-to-day trading activities. From manufacturing machinery, warehouse and fork lift truck equipment, office furniture and computer equipment to vehicles. The purchase cost of these assets has to be accounted for in the financial statements. UK financial reporting standards require that when Tangible fixed assets are acquired the cost of acquiring them should be treated as an asset on the balance sheet.
The profit and loss or Income and Expenditure should receive a regular expense that represents the portion of the cost (or in certain circumstances a re-valued amount) that has been consumed during the period. This expense is known as depreciation. The notion of an amount to be expensed during time periods implies that assets have a useful economic life. This can vary by asset, however for convenience, it is usual for entities to group assets into types of assets that have a similar nature, function or use, and then have a specific useful economic life policy by asset class. For example all computer equipment would be grouped together and a policy of three years useful economic life adopted. This would mean that one third of the cost of a computer would be expensed as depreciation each year of its life.
The Fixed Asset Register records all the details of assets purchased for the entity, if required it will also automatically calculate the relevant depreciation and charge the expense to the profit and loss. Your advisor will use reports from the Fixed Asset register to prepare elements for tax computations. We recommend that if you are unsure on any element of setting up and using the fixed asset register you should discuss with your advisor.
The Asset Register
The asset ledger is initiated by ticking the Asset Register box on the Optional Features tab of the Profile.
Control - Organisation Profile - Optional Features tab
An Asset Register sub-menu is now visible under the Expenses menu.
Expenses - Assets and/or Vehicles - Assets
The register provides functions to add new assets, re-value, impair or sell them. In addition facilities exist to deal with the purchase activity as well as a journal voucher capability to effect adjustments or correct errors.
Reports are available which show all the transactions relating to a particular asset. These are available via the Reports menu.
Types of Tangible Fixed Assets
Commonly, tangible fixed assets are grouped together by similar nature, use or function. This enables common policies for depreciation to be adopted as well as simplifying reporting. UK financial reporting standards outline the major types of tangible fixed assets that are used. The system has defined these types of assets into the asset register. In your entity you may use assets that fall into all or some of these classifications. You need only use the types that are relevant.
The types of assets defined are:
- Commercial Buildings
- Commercial Vehicles
- Computer Equipment
- Fixtures & Fittings
- Industrial Buildings
- Investments (Fixed Asset)
- Plant & Machinery
- Tractors & Combines
- Other Assets
Note Investment (Fixed Asset) would be for say a house or Office held for the purpose of receiving an income stream (and perhaps a revaluation at some time). For Cash Investments it may be more appropriate to use accounts that are not associated with the Asset Register such as Long Term or Short Term Investments.
What is depreciation?
For accounting purposes depreciation represents the extent to which the economic value of an asset to the entity has been consumed by the entity. For example, a computer is purchased today for £1500 and it is estimated to have an economic useful life of three years. Today the depreciation is zero (the computer has not yet been used). However in six months time the depreciation is £250 (1/6 of £1500) and at the end of the first year the cumulative deprecation is £500 (1/3 of £1500).
The above example is known as straight-line depreciation, because the consumption of the useful economic life is evenly spread over the life of the asset. An alternative rule is known as reducing balance. In this case the depreciation in each year is calculated as a percentage of the un-depreciated value. So for an asset with a purchase cost of £1000 depreciated at a reducing rate of 30%, the first year depreciation is £300 (30% of 1000), the second year depreciation is £210 (30% of 1000-300) and so on. The reducing balance rule is commonly used where the value of an asset falls more quickly in the early years than the latter years of its useful economic life. Car and Personal computers probably follow this pattern.
There are other rules for depreciation but straight line and reducing balance are the most common and the system offers these two options plus an option of not to depreciate. If a different rule is required than a manual depreciation option exists in which figure can be input directly rather than being calculated by the system. NOTE: With the reducing balance depreciation rule ever decreasing small amounts will be incurred in the latter years. In theory depreciation can go on forever. In order to prevent this, when the cumulative depreciation is 95% or more of the original cost (or re-valued amount), The system writes off all of the balance not depreciated.
The link offers examples of how the system calculates reducing balance depreciation.