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Managing a Business’ Fixed Assets
This is a professional term that ‘non-accountants’ try to avoid or ignore altogether. I’m making it easy for you. It’s actually quite straightforward; It just requires some commitment and understanding. Enjoy the learning experience.
What is property?
It is very important to understand this. Everything your business or you own is an asset. All this, the bar is nothing. Let’s go a little deeper into this; Consider the following.
A bank account balance (when positive) is a current asset
Petty cash account balances are always current assets
A long-term investment owned by a business is a fixed asset
Raw materials on hand are current assets
Work in progress Stock is a current asset
Stock on hand is a current asset
Hand stationery is a current asset
Cleaning materials on hand are current assets
The total debtor balance is a current asset
Motor vehicles are fixed assets
Machinery is a fixed asset
Land and buildings owned by a business are fixed assets
Computer equipment is a fixed asset
Furniture and fittings are fixed assets
What is Fixed Asset?
There are generally two types of assets in accounting terms; Fixed assets and current assets. The only difference between them is that the life of the current asset is short, less than one year; Fixed assets have longer lives; Generally two years and more. These two types of assets are considered separately on the balance sheet. It is, quite simply. Isn’t that so?
For example, a business’s cash book (account) is a current asset. why Since the value changes daily, it is not fixed or fixed. and buildings, land, machinery etc. It is very small compared to similar fixed assets. Also compare it to a fixed investment, which is usually long-term in nature.
Toilet paper, stationery, stocks, raw materials, cleaning materials, employee refreshments and the like will cease to exist for many days. It is no longer about a month before it is used up and needs to be replaced. However, you will have at least three years before replacing the land and buildings, vehicles, furniture, machinery, computers and office equipment; If not much time. The latter are fixed assets.
Another type of fixed asset of note is intangible assets; An object or property that you cannot touch or see. Above we only talked about tangible assets, things that exist physically. Intangible assets are:
Fixed asset category
Land and buildings
Machinery and special tools
These are more common fixed assets. For a detailed list, refer to the Internationally Accepted Accounting Practice document or your local revenue service’s approved list of fixed assets.
Fixed Asset Registration
It is very important that you keep a record of your fixed assets in a fixed asset register either on a spreadsheet or in a physical book. One can also use a database program, which automates the process and is usually accurate. You can browse for these on the Internet and at your local computer stores.
Your accountant will also have a fixed asset register which will need to be updated annually for audits and/or the presentation of annual financial statements. Always compare yours to it, make sure they are up to date and 100% correlated.
An added benefit is that you keep a check on your accountant/auditor.
Is the property a luxury?
This is a question that business directors face regularly. Luxury negatively affects one’s cash flow and profitability and should be avoided.
For example, a company car must be purchased. What size and price group is the best fit? Is it to impress fellow business owners? Is it to make the person feel important? To what extent will it be for the person’s personal use? Can we really afford it? Think carefully; Don’t overspend and then wonder why you have a cash flow problem.
It’s surprising how often huge sums are paid for a property when more affordable options are available. Often, machinery is purchased that is more productive. Its capacity is actually more than required. The mentality is often, “Well, let’s spend $250,000 and “buy more” than be stuck with something that’s too small and only worth $150,000.”
This is a valid argument but it can lead to a big mistake.
Always go back to your original business plan. Consider planned production and sales plans and then act accordingly; or revise the business plan. The worst case is to produce 5,000 products per month, while the market needs only 2,000 (estimated capacity) monthly for the next eight years. You’ll be stuck with 3,000 products per month, accumulating and paying for them; Because they are not going anywhere. critical error.
Do you see how important your business plan is? And does it need constant revision and review? Treat it as a dynamic living document; Your Business Bible.
When considering the purchase of immovable property:
When considering new/replaced fixed assets, start with minimum requirements
When buying a property, always consider the minimum requirement first and build from there. Many factors must be considered; Here are some:
– Have you exhausted the list of suppliers?
– Have you used all resources to obtain this information?
– You have considered all the variables, e.g. Size, capacity, lifespan, price, usability?
– Have you researched the past history of the models you are considering buying?
– Have you analyzed reliability, maintenance and service requirements?
– To what extent does the property purchase affect your cash flow? Do you have enough cash? Do you need to take out a long-term loan or buy a property on a hire purchase agreement? Will it require more capital investment by the directors/owners to achieve it?
– Can you really afford it, or is there a cheaper solution or alternative?
Mistakes made in this regard are unnecessary. It is better to spend the necessary time and take every precaution to ensure that you make the right decision.
Insure all property
This is very important. Ensure your assets are insured at their correct values; Thus ensuring that they are not or underinsured. This will cost you more in the long run.
Overinsuring means wasting money monthly on high premiums and receiving very little if a claim is submitted. Being insured means paying a low monthly premium but receiving almost nothing on submitting a claim.
Always ensure your insurance details are up to date, correct and checked by insurers.
Depreciation, revaluation and write off of fixed assets
Depreciation always occurs annually. For management reports and good corporate practice, it is better to do it monthly. It also facilitates more accurate monthly business operations reporting.
Remember, you don’t want to leave any hidden expenses like depreciation out of your operating reports.
Depreciation can be calculated using two standard methods; Straight Line Method or Declining Balance Method.
Straight line method
Essential Facts and Figures:
Lifespan of the asset (e.g. vehicles typically last 5 years)
Purchase price (or realistic value) plus any additional costs (e.g. delivery costs and setup costs)
– Calculation example:
The vehicle is valued at $60,000. Depreciable over 5 years (60 months).
60,000 divided by 5 = $12,000 per year or $1,000 per month
Balance reduction method:
This method is performed using the same information as above, except that the depreciation percentage is always calculated on the depreciated value.
Because the vehicle can be depreciated over five years, the percentage per year is then 20%.
First year: 60,000 X 20% = $12,000 (same as above)
Second year: 48,000 X 20% = $9,600 (much less)
And so on.
The problem with this method is that the depreciated value never reaches zero. It’s complicated, and the straight line method always works best for me. I suggest you use it too.
Revaluation of fixed assets
Reevaluation can be difficult and should be avoided whenever possible. Revaluation of fixed assets is valid only in two cases:
1. The asset was brought into the books at an incorrect value.
2. The market value of the property fluctuates and the new market value is truly and significantly different from the original purchase price and associated costs.
This article is written for business owners and managers. If you find such an occurrence, talk to your accountant to recalculate the value and depreciation, as this is a difficult accounting process. Remember that there will also be a loss or gain on revaluation, which should be reflected in your financial statements.
Write off fixed assets
This happens when an asset is stolen, destroyed or becomes completely irreplaceable at fair value. This is another example that will require your accountant’s attention. A fixed asset is usually written off at a loss, unless the asset is so old that it has no current value. This requires special accounting attention.
If you dispose of a fixed asset, remember that there will be a gain or loss on disposal and this must be reflected in the financial statements. Talk to your accountant about it, as it requires special accounting attention.
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