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  • Dwight Brisendine

Accounting for Fixed Assets and Intangible Assets

Business spending is usually for expenses related to current operations. There is some spending, however, that is of a more long term purpose and not for immediate operating expenses. This type of spending is most often for what are called “Fixed Assets” or “intangible Assets”. These types of assets have their own accounting rules. This article provides a summary overview of the rules for this accounting.


Overview


Fixed assets are tangible items of property that are used by a business for more than a year, usually multiple years, in carrying on their business activities. Examples of such assets would include land, buildings, equipment, vehicles, furniture, etc. Intangible assets are expenditures that are also for benefit of a business over a longer period of time, but do not exist as a “thing”. For example, the costs of the legal and CPA services for setting up a business, the costs of obtaining a bank loan, some research and development costs, and purchase of “Goodwill”. These items are shown on the Balance Sheet, not on the P&L.


Fixed Assets Accounting


The total spending on a fixed asset purchase, including taxes, delivery costs, installation, etc. is booked as the cost of the asset. This cost is included in the Fixed Asset section of the Balance Sheet.


The fixed asset cost is turned into expense over time by periodic deprecation calculations. There are many different ways that the tax regulations allow for depreciation to be calculated. Fundamentally, a “life” of the asset and a “method” of calculation are selected. Depreciation is then calculated, for the tax period and “Depreciation Expense” is booked into the P&L, reducing profit by the amount of the calculation. The offset is to “Accumulated Depreciation” on the Balance Sheet. The calculation ends when the total cost of the asset has been used up in Depreciation Expense.


There is also an alternative (and much quicker) way to turn the fixed asset cost into expense. This is generally termed Section 179 write off. Up to a set maximum amount for a year (usually changed annually) a business can elect to write off the total cost of fixed asset purchases in the year of purchase. This type of write off to expenses can only be used to the point at which it will create a tax loss for the business. In addition, tax laws allow for the direct expensing of equipment purchases under a pre-determined maximum (check with your tax preparer for the current maximum).


Fixed asset records are maintained in a document called a Depreciation Schedule. This document tracks for each asset: (1) acquisition date (2) depreciation life in years (3) depreciation method (4) cost of the asset (5) total accumulated depreciation calculated for prior periods (6) depreciation expense for the current period and (7) total accumulated depreciation at the end of the current period.


One additional point for fixed assets is that these costs are the basis for governmental calculation of a business’ property taxes. Property tax assessors generally consider the purchase cost of the asset, the length of time that the asset has been in service, and their calculation formula to determine the property taxes to be charged. Proper maintenance of the Depreciation Schedule can help greatly in providing the required information to the tax assessor.


Intangible Asset Accounting


The cost of intangible assets can sometimes be a bit tricky to determine. For example, an attorney or a CPA working on setting up a business (intangible asset) could also be working on legal and tax services that are expenses. The key is to understand whether such costs, or some portion, should be recorded as intangible assets or as expenses. Fortunately, the attorneys and CPAs can guide the business owner in this matter.


Converting these assets to expenses is very similar to calculation of depreciation (“life” and “method” are selected), but the rules are different and the accounting categories involved are Amortization Expense (on the P&L) and Accumulated Amortization (on the Balance Sheet). Amortization stops when the cost of the asset has been booked to expense.


Summary


Business spending for Fixed Assets and Intangible Assets are different from spending for normal business expenses. The accounting rules for recording these purchases and how they are converted into expenses are specific in nature. Tax advisors can help the business owner select the proper methods and see that the records and calculations are correct.

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