The Importance of Understanding Fixed Assets and Accumulated Depreciation

“Fixed assets” is a term describing all of the long-term operating assets that a business uses, whether it is a building, a crane, or even office furniture. Every fixed asset except for land costs is spread over the estimated useful life. The amount that each period receives is called “depreciation expense.”

It is crucial for a manager to know the company’s accounting methods for fixed assets, because some are expensed immediately, while others are capitalized, or placed into a fixed asset account.

Fixed Assets

Most businesses set a cost limit. Any expenditure that comes in under that cost limit, such as a wastebasket or a wrench, simply gets expensed right away because it is not really worth depreciating small-ticket items over a number of years. However, if an unusually large number of these assets are expensed during a single year, the controller should advise the manager because elevated expenses can have an adverse effect on the bottom line.

It is also important for a manager to know the company’s accounting policies for the estimation of useful lives of fixed assets and whether they use straight-line or accelerated allocation. With many companies, the manager would be included in this decision rather than leaving it completely up to the controller.

If a company uses accelerated depreciation, you can end up with fixed assets that have been fully depreciated but are still in active use. These assets should be reported to the manager. Even though the assets have no book value, the manager should know that no depreciation expense is being recorded for them.

Cost of Fixed Assets: Another piece of information that the manager needs is the cost of any fixed assets that need to be replaced in the near future. A regular status report for the manager, covering all of the company’s fixed assets, is useful as well. This report should include information about the operating efficiency, capacity, and projected life span remaining for all of the major fixed assets.

All of the leased assets that the company does not own but relies heavily upon for operation should appear in this report as well. Even though depreciation and replacement are not issues to be concerned about with leased assets, interrupted operations can interfere significantly with the bottom line.

An insurance Summary Report: This includes all of the fixed assets that have insurance coverage for fire and other casualty losses. Each major fixed asset needs to be listed with its type of coverage, claims during the

prior year, and any applicable deductible. The report should also have a list of the various risks that contribute to liability for the company and the insurance policy the company owns that provides coverage for each risk.

Depreciation Expense and Fixed Assets: Understanding the connections between depreciation expense and fixed assets is important for any successful business. Managers who are not aware of the coming issues with their fixed assets can end up having operations interrupted with a severe impact on the company’s bottom line, as well as the career path of the manager in charge. To ensure proper accounting of these reports, many companies choose to hire a professional accounting firm that can keep these reports organized and allow the manager to focus on the important tasks involved with running the business operation.

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