Aug 10, 2022 | By Michael Whitmire
We're going back to the basics in accounting, and the objective of this post is to walk you through the correct way to book a fixed asset journal entry and how to do fixed asset accounting, all the way from a new asset purchase to sale and write off. Whether you’re a bookkeeper or accounting clerk or an experienced staff accountant or CPA, it’s worth remembering the fundamentals to be sure everything is done right. But first, what is a fixed asset?
WHAT IS A FIXED ASSET?
A fixed asset is something that will be used in the business and that has a useful life of more than a year. In other words, a fixed asset is something you own that helps you operate your business and generate revenue over a longer period of time, as opposed to short-term assets like inventory and supplies, which are sold or consumed quickly.
EXAMPLES OF FIXED ASSETS
Examples of fixed assets include factory equipment, machinery, computers, vehicles, and office furniture. Buildings and any improvements to the inside or outside are also fixed assets. For example, a tenant may need to remodel the interior and pave the parking lot of a leased building. These are all examples of tangible assets — things you can touch.
WHAT IS THE FIXED ASSET ACCOUNTING PROCESS?
Unlike short-term assets, fixed assets provide economic benefit to the company for more than a year. Since the value of these assets to the company extends into more than one accounting period, GAAP rules dictate that capitalization is needed, rather than simply expensing the cost of the asset all at once. Fixed asset depreciation is the process of
HOW TO BOOK FIXED ASSET ENTRIES
As an example, we settled on a 200-year-old restored barn wood boardroom table from Michigan, which is also our token fixed asset example. Let’s walk through the bookkeeping and how this appears in the financial statements.
1. The Rules (aka GAAP)
According to GAAP, this table will only be good for seven years. This is because the table is considered a fixed asset, and GAAP classifies all fixed assets into predetermined categories or “buckets” in order to estimate their “useful life.” The table, in this example, falls under the “Furniture and Fixtures” category, which is set at seven years.
That 200-year-old wood will probably take us past seven years, but at the same time, the chairs around the table may only last two. If you look around at all the furniture and fixtures in your office, altogether they will likely last an average of something like seven years.
To get this table, our general contractor Ed contracted another table designer to build it. Say the price of the table itself comes out to $3,200. However, Ed charges us a contractor fee of 15%, which adds another $480. Shipping the table costs another $100, so that means the final bill comes out to $3,780.
2. How to Categorize Supporting Costs: Capitalized or Expensed?
Now, the table is clearly a fixed asset. We paid a price for it, and according to GAAP, it will continue to provide us with value for around seven years (hopefully a lot more).
What about the contractor fee? It’s not a fixed asset. It looks more like an expense because it was just a fee that doesn’t add any value, not something of value that we can go back out and sell. The shipping cost is similar. Do we capitalize the cost of the table and expense the rest?
Turns out, we capitalize everything – the purchase price of the table, the contractor fee, and the shipping cost. The cost of an asset includes all the costs needed to get the asset ready for use.
3. How Do We Book this Journal Entry?
Starting from when Ed sends us the invoice, this is how we will book the journal entries at each stage in the process:
Invoice: When we receive the invoice, we need to record the purchase of a fixed asset on the balance sheet. So we debit the asset account Fixed Assets since we have added value to our Fixed Assets. We also credit Accounts Payable, since we owe money but we haven’t paid it yet. Note that we’re using a single “Fixed Assets” account, but it’s likely that you’ll have several accounts for different fixed assets or groups or fixed assets, with unique account names and account numbers, to allow for depreciation and adjustments of individual assets.
Payment: A few weeks later, when we pay, we then debit that amount in Accounts Payable and credit it to the Cash account to even everything out.
Depreciation:Here’s where it starts getting nerdy. Since we are recognizing value over time from the table until it “expires” (after 7 years), we have to account for that value over time. According to GAAP, we do this monthly as a depreciation expense. Some accounting platforms, like Oracle, have tools to help track fixed asset depreciation, but in many cases you’ll need to do this manually with journal entries. Each month, we’ll take value out of the asset and add it to a new account, Accumulated Depreciation. Over the useful life of the asset, the depreciable value gets expensed over on the income statement to a Depreciation Expense account. Keep in mind that this is a paper expense that has already been paid for, so it has no impact on cash flow as it is expensed each month, it’s simply a process to record depreciation and track the book value of an asset.
Using the straight-line depreciation method, you spread out the cost over the useful life of the asset. In our case, that’s 7 years, so our monthly depreciation expense is $45 per month ($3,780 divided by 84 months).
At any point in time, we can determine the remaining value of the table — its net book value — by netting Fixed Assets and Accumulated Depreciation. After one month, the net book value of the table equals $3,780 - $45 = $3,735.
When the amount in the accumulated depreciation account reaches $3,780, the full value of our table has been recognized as depreciation expense on the income statement.
According to GAAP, we also need to consider what happens when those seven years are up to determine its salvage value. Say we estimate that in seven years, we could sell the table for $400. Then its depreciable base is $3,380 ($3,780 - $400), and our monthly depreciation expense is $40.24 ($3,380 divided by 84). After seven years, the table’s book value would equal its salvage value of $400. However, in practice, most accountants assume the salvage value is negligible and simply ignore it.
4. What if We Sell the Asset?
Say you get tired of the table after two years, and decide to get rid of it before it’s seven-year life is over. However, maybe a few wealthy homeowners decided that barn wood is the latest and greatest for home décor, and with 200-year Michigan barns in pretty high demand, the fair market value has shot up.
Now, if we were living in the U.K. or another country that follows IFRS instead of GAAP, we could elect to perform a revaluation of that asset up to its fair market value as soon as we found out about that steep increase in value. Sadly, though, GAAP does not allow revaluation.
You sell your boardroom table for $20,000. Here’s the journal entry to record the sale of the asset. When we sell the table, we write off the remaining balances in both Fixed Assets and Accumulated Depreciation in the general ledger. The difference between the book value of the asset and our sales proceeds is recognized as a gain.
|Gain on Asset Disposal||$17,300|
OTHER FIXED ASSET JOURNAL ENTRIES
Accounting for fixed assets can be a bit complicated and there are a number of other fixed asset transactions that may call for journal entries. For instance, let’s say that your barn wood boardroom table (try saying that three times fast!) doesn’t live out its days until fully depreciated or sell at a gain to a stylish homeowner. You may decide that your table isn’t big enough for your growing company and sell it along the way, debiting Cash (or Accounts Receivable) and crediting Fixed Assets.
The table may also decrease in value along the way and end up worth less than the carrying value instead of more, this is called impairment. For example, if the table is damaged in some way, you may need to decrease the book value of the asset and record an impairment loss on your income statement.
And that's how you book a fixed assets journal entry. We have more how-to's when it comes to booking journal entries, which can be found right here. And, of course, don't hesitate to reach out to us via social if you need any more help. After all, we're here to make you a better accountant.
How do you write a journal entry for an asset? ›
- In light of above rule, journal entry for purchase of asset should be:
- Asset A/c Dr.
- To Bank A/c.
- (Being asset purchased for cash)
- Asset A/c Dr.
- To Vendor/ creditor A/c.
- (Being Asset purchased on credit)
When a fixed asset is acquired in exchange or in part exchange for another asset, the cost of the asset acquired should be recorded either at fair market value or at the net book value of the asset given up, adjusted for any balancing payment or receipt of cash or other consideration.What is the journal entry for fixed assets and depreciation? ›
The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets).What is fixed assets with journal? ›
Fixed Asset Entries
Fixed assets are also known as tangible assets such as plant & machinery, office equipments, land, buildings, furniture and vehicles etc. Fixed assets are purchased for long term business purpose.
Double-entry refers to an accounting concept whereby assets = liabilities + owners' equity. In the double-entry system, transactions are recorded in terms of debits and credits.How do you record depreciation and assets? ›
Depreciation expense is recorded on the income statement as an expense or debit, reducing net income. Accumulated depreciation is not recorded separately on the balance sheet. Instead, it's recorded in a contra asset account as a credit, reducing the value of fixed assets.How to do fixed asset accounting? ›
- Assign an asset class. Match the fixed asset to the company's standard asset class descriptions. ...
- Assign depreciation factors. ...
- Determine salvage value. ...
- Create depreciation calculation. ...
- Print depreciation report. ...
- Create journal entry. ...
- Enter the transaction. ...
- File backup materials.
Fixed assets are recorded as a debit on the balance sheet while accumulated depreciation is recorded as a credit–offsetting the asset.Where are fixed assets recorded? ›
Fixed assets are recorded on a company's balance sheet with the Property, Plant and Equipment classification. Fixed assets are depreciated over their useful lives to reflect wear and tear and to reduce the cost of the assets on the balance sheet.How do you record fully depreciated fixed assets? ›
The accounting for a fully depreciated asset is to continue reporting its cost and accumulated depreciation on the balance sheet. No additional depreciation is required for the asset. No further accounting is required until the asset is dispositioned, such as by selling or scrapping it.
What is journal entry for depreciation? ›
Depreciation Journal Entry is the journal entry passed to record the reduction in the value of the fixed assets due to normal wear and tear, normal usage or technological changes, etc., where the depreciation account will be debited, and the respective fixed asset account will be credited.Do you create a journal entry for depreciation? ›
Using depreciation allows you to avoid incurring a large expense in a single accounting period, which can severely impact both your balance sheet and your income statement. Once depreciation has been calculated, you'll need to record the expense as a journal entry.How do I record a fixed asset in QuickBooks? ›
- Open the Fixed Asset Item List. From the menu bar, select List > Fixed Asset Item List.
- Add a New Item. Click the “Item” button in the lower-left corner of the list window. ...
- Select Account. ...
- Purchase Information Section. ...
- Asset Information Section. ...
What are some examples of fixed assets? Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment.How does GAAP define a fixed asset? ›
What are fixed assets? Fixed assets—also known as tangible assets or property, plant, and equipment (PP&E)—is an accounting term for assets and property that cannot be easily converted into cash. The word fixed indicates that these assets will not be used up, consumed, or sold in the current accounting year.What are the assets in journal entry? ›
Assets (Machinery, Building, Land, etc.) can also be purchased or sold in cash or on credit. Assets purchased are not represented through Purchases but with the name of the Asset.What is the entry for fully depreciated asset? ›
Disposal of a Fully Depreciated Asset
When an asset reaches the end of its useful life and is fully depreciated, asset disposal occurs by means of a single entry in the general journal. The accumulated depreciation account is debited, and the relevant asset account is credited.
When there is a gain on the sale of a fixed asset, debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account.Is depreciation capitalized or expensed? ›
Depreciation is an expense recorded on the income statement; it is not to be confused with "accumulated depreciation," which is a balance sheet contra account. The income statement depreciation expense is the amount of depreciation expensed for the period indicated on the income statement.How do you write off fixed assets? ›
A fixed asset write off transaction should only be recorded after written authorization concerning the targeted asset has been secured. This approval should come from the manager responsible for the asset, and sometimes also the chief financial officer.
What is fixed assets in accounting with examples? ›
Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.What is the journal entry for a fixed asset addition? ›
The entry is to debit the accumulated depreciation account for the amount of all depreciation charges to date and credit the fixed asset account to flush out the balance associated with that asset. If the asset was sold, then also debit the cash account for the amount of cash received.Are fixed assets on P&L? ›
An income statement, also called a profit and loss statement (P&L), shows a company's revenue and expenses during a specific reporting period. "Fixed asset purchases are not recorded on the income statement," says Zeiter. "Instead, they are expensed over the expected lifetime of the asset using depreciation.How do you post depreciation on fixed assets? ›
Enter depreciation amount in the Credit field. Select Post to post the journal. Click Fixed assets > Fixed assets > Select a fixed asset > Books tab on Action Pane. Click Transactions and notice that the depreciation amount was posted for the fixed asset group without the specification of an asset.What is the journal entry for amortization? ›
Record amortization expenses on the income statement under a line item called “depreciation and amortization.” Debit the amortization expense to increase the asset account and reduce revenue. Credit the intangible asset for the value of the expense.What are the 3 depreciation expense methods? ›
The four methods for calculating depreciation allowable under GAAP include straight-line, declining balance, sum-of-the-years' digits, and units of production.Is depreciation a credit or debit entry? ›
A normal depreciation account is a debit in nature since it is an expenditure, while accumulated depreciation is of credit in nature as it is initially recorded when the depreciation account is recorded as an expense. Also read: MCQs on Depreciation.What is the entry to record $1000 of depreciation? ›
In order to record the adjustment entry for the depreciation expense of the delivery equipment, "depreciation expense" is debited with $1,000 and "Accumulated Depreciation-Delivery Equipment" is credited with $1,000.How do I categorize fixed assets in QuickBooks? ›
- Go to the Accounting menu, and then choose Chart of Accounts.
- Click New at the upper right corner.
- From the Account Type drop-down arrow, choose Fixed Asset or Other Assets.
- In the Detail Type drop-down arrow, select the option that nearly describes the asset.
- Enter the account name.
- Open Fixed Asset Manager.
- In the Schedule tab, highlight all the assets that need to be assigned to a specific account.
- Right-click the selected assets and choose Assign G/L Accounts to Assets.
- Select the account, then OK.
What is a fixed asset in Quickbooks? ›
Fixed assets are items that have been purchased by a business that are not easily converted back into cash. They often require more effort to return their cash value to the business. Fixed assets can also be referred to as long-term assets or non-current assets.What are the 7 types of assets? ›
- Cash and cash equivalents.
- Accounts Receivable.
- PPE (Property, Plant, and Equipment)
- Patents (intangible asset)
The criteria to capitalize an item as a fixed asset are that it must both meet a dollar threshold and provide a useful life greater than one accounting period (one fiscal year).How are fixed assets classified in accounting? ›
Fixed assets are classified into two categories: real and personal property.What might be some criteria to recording fixed assets? ›
- Have a useful life of greater than one year; and.
- Exceeds the corporate capitalization limit.
The Asset Journal is the Asset Management Council's official publication. Commencing in 2007, this quarterly Journal continues to cover the latest asset management and maintenance topics for its members and the wider asset management and maintenance community.What is an example of an account for an asset? ›
Some examples of asset accounts include Cash, Accounts Receivable, Inventory, Prepaid Expenses, Investments, Buildings, Equipment, Vehicles, Goodwill, and many more.What should be recorded as an asset? ›
Examples of assets that are likely to be listed on a company's balance sheet include: cash, temporary investments, accounts receivable, inventory, prepaid expenses, long-term investments, land, buildings, machines, equipment, furniture, fixtures, vehicles, goodwill, and more.How do you Expense an asset? ›
In order to deduct the cost of a business asset, you will need to choose whether to claim the cost all at once or to spread these deductions across the useful life of the asset by claiming depreciation. When you depreciate an asset, you deduct a portion of the asset's cost each year for its entire useful life.What is ledger entry for asset? ›
The asset ledger is the log of entries affecting asset accounts from all recorded journal entries. The asset ledger is one of many subsidiary ledgers that feed into a company's general ledger. The general ledger is used to construct the company's financial statements.
What are the 3 journal entries? ›
There are three main types of journal entries: compound, adjusting, and reversing.What are the 5 types of journal entries? ›
- Opening entries. These entries carry over the ending balance from the previous accounting period as the beginning balance for the current accounting period. ...
- Transfer entries. ...
- Closing entries. ...
- Adjusting entries. ...
- Compound entries. ...
- Reversing entries.
Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment.What are the 5 asset accounts? ›
- Stockholders' equity (or owner's equity)
Assets are the economic resources belonging to a business. Assets could be money in a cash register or bank account, or items such as property, fixtures and furniture, equipment, motor vehicles, and stock or goods for resale.When should fixed asset be recorded? ›
Fixed assets should be recorded at cost of acquisition. Cost includes all expenditures directly related to the acquisition or construction of and the preparations for its intended use. Such costs as freight, sales tax, transportation, and installation should be capitalized.How do you handle fixed assets? ›
- Location. You need to know where your fixed assets are located. ...
- Quantity. Keep track of how many fixed assets you have. ...
- Condition. Note the condition of your fixed assets. ...
- Maintenance schedules. ...
- Depreciation status.
Depreciation Journal Entry is the journal entry passed to record the reduction in the value of the fixed assets due to normal wear and tear, normal usage or technological changes, etc., where the depreciation account will be debited, and the respective fixed asset account will be credited.Is a fixed asset an expense? ›
Fixed assets lose value as they age. Because they provide long-term income, these assets are expensed differently than other items. Tangible assets are subject to periodic depreciation while intangible assets are subject to amortization. 1 A certain amount of an asset's cost is expensed annually.What should be capitalized vs expensed? ›
When to Capitalize vs. Expense a Cost? The Capitalize vs Expense accounting treatment decision is determined by an item's useful life assumption. Costs expected to provide long-lasting benefits (>1 year) are capitalized, whereas costs with short-lived benefits (<1 year) are expensed in the period incurred.
How do you record journal entry expenses? ›
Expenses are a part of the Nominal account. The Cash Account will be decreased with the amount paid as expenses, so it will be credited and Expenses will be debited according to the rule of the Nominal account. Journal Entry: Example 1: Rent paid in cash ₹5000.