What Are Fixed Assets?
Fixed assets (also called property, plant, and equipment or PP&E) are long-term tangible assets used in business operations. They're not intended for sale and have a useful life greater than one year.
Capitalization vs. Expensing
When to Capitalize
An expenditure should be capitalized when it:
- Exceeds the capitalization threshold (typically $500-$5,000)
- Has a useful life greater than one year
- Is used in business operations
- Provides future economic benefit
What to Include in Asset Cost
- Purchase price
- Sales tax (if applicable)
- Freight and delivery charges
- Installation costs
- Testing and preparation costs
- Professional fees for installation
Setting Your Capitalization Threshold
Consider these factors:
- Organization size and asset volume
- Industry standards
- Administrative burden vs. accuracy
- IRS de minimis safe harbor ($2,500 per item)
Fixed Asset Register Requirements
Every fixed asset should have a record including:
- Asset identification number
- Description and specifications
- Acquisition date and cost
- Vendor and purchase documentation
- Location and department
- Useful life and depreciation method
- Salvage value
- Current book value
Accounting for Asset Additions
Journal entry for asset acquisition:
Debit: Fixed Asset (at cost)
Credit: Accounts Payable or Cash
Recording Depreciation
Monthly or annual depreciation entry:
Debit: Depreciation Expense
Credit: Accumulated Depreciation
Asset Improvements vs. Repairs
Capitalize (Improvements)
- Extends useful life significantly
- Increases capacity or efficiency
- Adds new capability
Expense (Repairs)
- Maintains current condition
- Restores to original condition
- Routine maintenance
Asset Disposals
When disposing of an asset:
- Calculate depreciation through disposal date
- Determine book value at disposal
- Record sale proceeds (if any)
- Calculate gain or loss
Disposal entry:
Debit: Cash (proceeds)
Debit: Accumulated Depreciation
Debit/Credit: Gain or Loss on Disposal
Credit: Fixed Asset (original cost)
Audit Preparation
- Maintain complete documentation
- Perform regular physical inventories
- Reconcile subledger to general ledger
- Keep depreciation schedules current
- Document disposal approvals
Integration with Asset Management Systems
Modern asset management systems can:
- Automatically track all required data
- Calculate and record depreciation
- Generate audit-ready reports
- Link physical assets to accounting records
- Flag discrepancies for investigation