Most businesses will use some fixed assets in their day to day trading activities. From manufacturing machinery, warehouse and fork lift truck equipment, office furniture, computer equipment to vehicles.
The purchase cost of these assets have to be accounted for in the business financial statements. When tangible fixed assets are acquired, the cost of acquiring them should be treated as an asset on the balance sheet. The profit and loss account will be charged a portion of the cost (or in certain circumstances a re-valued amount) that has been consumed
during the period. This expense is known as depreciation.
The notion of an amount to be expensed during time periods implies that assets have a useful economic life. This can vary by asset, however for convenience, it is usual for businesses to group assets into types of assets that have a similar nature, function or use, and then have a specific useful economic life policy by asset class.
For example all computer equipment would be grouped together and a policy of three years useful economic life adopted. This would mean that one third of the cost of a computer would be expensed as depreciation each year of its life.
The Fixed Asset Register records all the details of assets purchased for the business, if required it will also automatically calculate the relevant depreciation and charge the expense to the profit and loss account. Your accountant will use reports from the Fixed Asset register to prepare elements for tax computations. No matter how many fixed assets you have, the important thing is to make sure they are all accounted for – throughout their life cycle. The difference between having a comprehensive fixed asset management solution and not, can be measured by the thousands of dollars companies stand to gain every year by managing their assets effectively or loss every year by managing their assets loosely.
Company buy assets for the purpose of generating economic benefits or revenue and because company funds are used to make such purchases, it will be reflected in the balance sheet as Fixed asset (as oppose to current asset).
Example a cheque is issued to buy a vacuum cleaner or a hire-purchase company finance the purchase of the motor vehicle
A cleaning company that buys a vacuum cleaning machine to carry out cleaning services to their client in order to earn revenue. The purchase of such equipment would be classified as an asset.
However, if another company in a trading business buys the same machine to clean the office premise, may classify it as an expense, with the consideration of the amount involved or the number of years it is expected to be in use.
If the amount is too small, it would not be worth the administrative trouble to depreciate it every month or every year, as it is not going to make a material impact on the Profit and loss.
Then how much is considered too small and how much is considered big?
Of course the trading company can still classify the purchase as fixed asset and amortize (depreciate) over a 24 months (or 2 year) period, it is a judgmental issue that can only decided by the accountant or the company policy. In order to avoid any doubts, some company's practice is to decide any amount below $100 (example) to be expensed off
One of the generally accepted accounting principle , matching principle requires that expense be matched with the revenue generated.