How to Account for Fixed Assets
Determine the cost of acquisition., Determine the useful life of fixed asset., Estimate the residual value of the fixed asset.
Step-by-Step Guide
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Step 1: Determine the cost of acquisition.
This refers to the amount of money spent to purchase a fixed asset such as a large piece of machinery.
It also includes any amounts that can be attributed directly for its improvement such as the following:
Costs of delivery Costs associated with the acquisition of asset such as import duties or stamp duty Costs paid for preparation of asset installation Professional fees such as legal or architect's fees -
Step 2: Determine the useful life of fixed asset.
Useful life refers to the time period that an asset will be useful to the business (economic life), not how long it will actually last (physical life).
Factors such as the age of the asset when it was acquired, how often it is used, environmental conditions, technological advancements, and the company's repair policy can affect its useful life.Useful life refers to the period in which the asset is expected to be used that may include maintenance or repairs.
It is usually less than the physical life.
It can also be called economic life, average life, or effective life.For example, when you buy a large piece of new machinery the manufacturer may tell you it will last for 20 years.
However, you know it will be used 24 hours a day outside and that there will probably be better technology available after 10 years.
Therefore the machinery will most likely be useful to the business for only 10 years.
Therefore, 10 years is its useful life. , Residual value is the worth or recoverable value of fixed asset at the end of its useful life.
When estimated value is not of a significant amount, its value is assumed to be
0.
Residual value is important in accounting because the book value of a fixed asset can never be depreciated to a value below residual value.
You may also see this value referred to as "salvage value." For example, if you decide to replace an old piece of machinery with a new one, someone else may want to buy the old one.
Its residual value is what a willing buyer would pay a willing seller, or you could look up ads for what similar pieces of used equipment are selling for on the market. -
Step 3: Estimate the residual value of the fixed asset.
Detailed Guide
This refers to the amount of money spent to purchase a fixed asset such as a large piece of machinery.
It also includes any amounts that can be attributed directly for its improvement such as the following:
Costs of delivery Costs associated with the acquisition of asset such as import duties or stamp duty Costs paid for preparation of asset installation Professional fees such as legal or architect's fees
Useful life refers to the time period that an asset will be useful to the business (economic life), not how long it will actually last (physical life).
Factors such as the age of the asset when it was acquired, how often it is used, environmental conditions, technological advancements, and the company's repair policy can affect its useful life.Useful life refers to the period in which the asset is expected to be used that may include maintenance or repairs.
It is usually less than the physical life.
It can also be called economic life, average life, or effective life.For example, when you buy a large piece of new machinery the manufacturer may tell you it will last for 20 years.
However, you know it will be used 24 hours a day outside and that there will probably be better technology available after 10 years.
Therefore the machinery will most likely be useful to the business for only 10 years.
Therefore, 10 years is its useful life. , Residual value is the worth or recoverable value of fixed asset at the end of its useful life.
When estimated value is not of a significant amount, its value is assumed to be
0.
Residual value is important in accounting because the book value of a fixed asset can never be depreciated to a value below residual value.
You may also see this value referred to as "salvage value." For example, if you decide to replace an old piece of machinery with a new one, someone else may want to buy the old one.
Its residual value is what a willing buyer would pay a willing seller, or you could look up ads for what similar pieces of used equipment are selling for on the market.
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Charlotte Fox
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