In business, there are processes that remain constant and necessary: accounting and tax reporting. Because of this, it is crucial for every business owners to know how they can account for their fixed assets.
Fixed assets are those properties which can’t be easily converted to cash. To account for these, you must conduct the steps involved below:
Know the “real” cost of a fixed asset
The “real” cost of the asset to be used for tax reporting is not the actual cost when it was purchased. This also includes the cost of delivery, installation expenses, professional fees and other charges incurred to get the product into working condition. Take note that administrative and overhead costs are not included in this computation.
Collect all receipts of all your fees for the particular fixed asset and determine the total cost of the relevant expenses. Take note of the total amount that will come up and proceed with the next steps.
Determine the asset’s useful life
The asset has a physical life and an economical life. All assets will meet its expiration or deterioration stage in time but it can be prolonged by maintenance and repairs
Some assets may be repairable but sometimes, a business may not keep an asset which they are unprofitable or uneconomic to use. This is how the economic life on an asset can be measure. Also, this is what you would need to use for purposes of calculating depreciation.
Find the residual value
If a fixed asset’s useful life has ended, the business will dispose it by selling and the amount that they will receive on this deal will be the residual value of the fixed asset. Since the business will account or file taxes while the fixed asset is functioning well, accountants or owners must estimate.
Depreciation of a fixed asset simply tackles about wearing out or loss of value of a particular asset or property. The depreciation amount to be charged will depend on the values that have been determined on the above steps. These are:
- Cost of Fixed Asset
- Useful Life Value
- Residual Value
The most common way of computing for depreciation value is by deducting the residual value from the cost of the fixed asset and dividing it by its useful life. This process is called the straight-line method.
Report the values
After you’ve come up with the values needed for accounting and taxation, enter those in a balance sheet at the end of accounting cycle. This could be annually, quarterly or monthly.
As a business owner it is very important for you to know the above steps. Having complete knowledge about this will assist you in growing your business and save you from complex problems that accounting and tax filing may give you.