Defining Fixed Assets
Most small scaled business founders are often caught in a conundrum when it comes to listing out the fixed assets of a company. Based on the source you refer to, certain assets can be classified as fixed or current, creating confusion. So what is a ‘Fixed Asset’?
One definition of a fixed asset is “A long-term tangible piece of property that an organization owns and uses in the production of its income and is not expected to be consumed or convert into cash any sooner than at least one year’s time”.
However, this again creates confusion. For example, your accounting department uses computers. These are used for calculating payroll, revenue, expenses, et al and for storing and reporting data related to the business. Yet, they do not directly contribute to your business which might be something like manufacturing.
So can it be termed as a fixed asset? Yes, it can be. This is because computers have a life of over a year and are used to deliver value to the business, indirectly if not directly. But computers are current assets to the company which manufactures them, being labelled inventory and not fixed assets.
The following are examples of general categories of fixed assets:
• Computer equipment
• Furniture and fixtures
• Intangible assets
These fixed assets can again be classified as appreciating or depreciating, based on whether they gain or lose value over time. A vintage car would be an appreciating fixed asset to the individual, but technically a car is a fixed asset that depreciates over time. So classification of fixed assets can be contextual as well.
The Importance of Fixed Assets
Information about organization’s assets helps in creating accurate financial reporting, business valuation and thorough financial analysis. Investors use these reports to determine a company’s financial health and decide whether to buy shares in or lend money to the business. Because a company may use a range of accepted methods for recording, depreciating and disposing of its assets, analysts need to study the notes on the corporation’s financial statements to find out how the numbers were determined.
Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Furthermore, the determination of whether expenditure represents an asset or an expense can have a material effect on an enterprise’s results of operations. There are definite measures taken by every organization to manage these assets effectively.
Fixed Assets Life Cycle
Fixed asset lifecycle is divided into five primary stages:
Fixed Asset Tracking and Utilization
Efficiency and productivity of the asset improves with correct utilization, maintenance and tracking of asset utilization. This entire process can be clubbed under Fixed Asset Management, and systems are used to track the utilization and performance of fixed assets, mainly equipment and machinery. Defining ownership of the asset by location, department or individual also helps in assigning responsibility for the upkeep and continued productivity of the asset, as well as tracking it to prevent pilferage, loss or under-utilization. In a multi-department, multi-location or multi-project scenario, keeping track of these assets is also critical to the profitability of the business.
Asset tracking software like Tracet automates the Fixed Assets Tracking process by integrating barcode / QR code scanners and printers. They also generate reports as and whenever required.
Fixed Assets Depreciation
Fixed assets lose value as they age. Because they provide long-term income, these assets are expensed differently than other items. Fixed assets are subject to periodic depreciation and a certain amount of the asset’s costs is expensed annually. The asset’s value decreases along with its depreciation amount on the company’s balance sheet. The organization can then match the asset’s cost with its long-term value. Organizations need to maintain certain standard while performing depreciation. In India, depreciation is calculated as per standards mentioned in Companies Act 2013, Income Tax Act or IFRS standards.
Solutions for Fixed Asset Tracking
It is important for every organization to maintain a proper track and manage fixed assets periodically in order to build profitability and viability of the business. Products like Tracet help organizations to effectively track, optimally manage fixed assets and comply with all statutory governances including IFRS standards, Companies Act 2013 etc. A web based solution available in both on-cloud & on-premise variants, Tracet also offers complete fixed assets auditing services, including physical verification and detailed fixed asset auditing. To know more about how Tracet adds value to your fixed assets tracking efforts, contact us at email@example.com or fill out the form provided below.