Fixed assets glossary terms for the Sage Advice Glossary section

 

What are fixed assets?

A fixed asset is an accounting term that describes the tangible assets or properties a company owns and uses to make income. These are also known as property, plant, and equipment (PP&E) or capital assets. The value of these types of assets is reported at the end of each tax year according to specific calculation rates since they can’t be easily converted into cash.

What are fixed asset accounting and tracking?

Fixed asset accounting is the process a company uses to record and report the value of their fixed assets. The values often vary for the same asset for financial, income tax, property tax purposes. Tracking is the process of reconciling the individual assets represented in the company’s accounting records to their physical existence. The correct location of the assets is important for state income tax and local property tax reporting. Together, these processes are important because companies have legal and financial reporting obligations at the end of each tax year, and non-compliance could mean harsh penalties.

Fixed assets are a critical enabler of business growth. Any organization is going to need computers, copy machines, desks, and office equipment in order to thrive and do what it does best, no matter the industry. But all of these assets need to be tracked and depreciated over time according to complicated schedules. Depending on the asset involved and the rules and regulations that apply to it, an individual asset typically must be depreciated using multiple schedules. Depreciation methods and lives are usually different for financial accounting and federal and state income tax purposes.

Fixed asset depreciation, the process of tracking the life cycles of fixed assets and reporting their value for financial statement, insurance and tax purposes, is one of the most important financial processes in any business or organization. Many companies struggle to accurately log and report on their fixed assets, however, overpaying insurance premiums and taxes as a result. Inconsistent fixed asset records and depreciation calculations can result in increased audit fees from accounting firms.

 

What items are included in fixed assets?

Fixed assets are the items a company purchases for use over a time frame longer than the financial reporting year. This list includes furniture, equipment, property, motor vehicles, fixtures, desks, chairs, filing cabinets, and so forth.

What is the importance of fixed asset accounting software?

It’s not uncommon for a business to manage its fixed assets inventory and depreciation schedule using spreadsheets, conducting informal and ad hoc surveys of fixed assets to update its records when the staff has time. This can lead to gaps in record keeping, quickly throwing the inventory off kilter. Tax laws are growing more complex each year. For many organizations with sophisticated schemes, it can be difficult – even overwhelming – to ensure assets are recorded and depreciated correctly. Doing so manually using spreadsheets puts accuracy and security at risk, which can be costly for any size organization.

Businesses can also end up missing out on deductions to which they would otherwise be entitled. Ultimately, a company could be saddled with a higher total cost of ownership (TCO) for its fixed assets than is necessary. As a result, an inefficient fixed asset depreciation process can cause that company to waste capital that it could otherwise be applying toward smart investments that help the business grow.