9 - Fixed Assets

Fixed Assets are those items which are of ongoing use in the business.

Common examples are motor vehicles, buildings, machinery & office fittings.

The cost of these assets is carried forward (capitalised) in the Balance Sheet, reduced by a depreciation charge each year to the Profit & Loss account. Cost less accumulated depreciation to date is known as the Net Book Value (NBV).

Fixed Asset "T" accounts

We usually have 2 "T" accounts for each category (e.g. motor vehicles) of fixed asset - the cost account & the accumulated depreciation account (these can be combined to give a NBV account but this is only recommended for the simplest of business).

Cost "T" account

When a fixed asset is purchased, the cost is Debited to the appropriate cost "T" account (Cr Cash or Creditors Control or Hire Purchase Creditor).

Accumulated Depreciation "T" account

At the year-end, a depreciation charge is made on most fixed assets. This account is Credited & a Dr is made to the Depreciation Charge "T" account (this is an expense whereas the accumulated depreciation "T" account is carried forward in the Balance Sheet - offset against the relevant cost "T" account).

The amount of depreciation charged depends on the type of asset. This adjustment is often best left to your accountant.

Disposals

When you sell a fixed asset, you will usually make a profit or loss on sale.

You need to remove the cost of the sold asset & the accumulated depreciation to date from the appropriate "T" accounts (detailed records must be kept - this area is fairly complex & best left to your accountant if in doubt).

Recording a disposal

The double-entry involves setting up a disposals "T" account.

To remove the cost, Cr the Cost "T" account (with the original cost of the asset) & Dr the Disposals "T" account.

To remove the accumulated depreciation, Dr that "T" account & Cr the Disposals "T" account.

Record the cash received by Debiting the Cash "T" account (or Debtors Control account if not paid immediately), & Cr Disposals "T" account.

You should now close off the Disposals "T" account - add up both sides & then put in a balancing figure in the lower side (this goes to the Profit & Loss account - see next section).

If the Dr(left) side was greater, you have made a loss on disposal. If the Cr(right) side was greater, you made a profit.

The next section will deal with the year-end adjustments & procedures.