Fixed Assets in Small Businiess Accounting
Most beginning business people and bookkeepers do not full comprehend the differences between expenses and amortized assets. This can be confusing, at first, since these are all items that must be paid for and therefore expensed in a business. However, the easiest way to think of the difference is to think that items that must be amortized - fixed assets - are those items that will be contributing to the business over a longer period of time, usually more than one year. Defining an Asset versus an Expense Understanding an item that is a simple expense, and therefore doesn't require amortizing (depreciating the cost of the asset over more than one year) is another approach. Items that are expensed immediately are those items that are to be disposed of right away. These are items that make up the cost of the goods sold, advertising that is consumed right away (in other words, not the sign that goes on the building), and some other items that are of small expense (usually under $200). If an item is used by the business for more than one fiscal period and costs more than $200, then it is most often a fixed asset and must be amortized. This includes office machines, furniture, buildings, software, computers, and large construction tools (in Canada this is defined as tools costing more than $500). In order to correctly amortize (or depreciate) the item only a certain amount of the expense is allowed in each year. The amount that is permitted depends entirely on the class of the asset. For example, buildings are considered amongst the longest term assets and usually are depreciated on a declining balance basis at 4% per year.
A declining balance basis means that each year the amount that is allowed to be expensed is a percentage of the remaining balance. For example, an asset that is worth $2000 in year one and allowed a depreciation rate of 8% will be allowed to have $160 expensed in the first year. This leaves the asset with a remaining value of $1840 at the end of the fiscal period. Most assets are subject to a 50% rule in the year of acquisition (the first year of use), meaning that only half of the normal rate is allowed to be expensed for tax purposes. In this instance, that means that the item would only be allowed 4% instead of the aforementioned 8%. Therefore only $80 would be expensed in year one, and the item would then be left with an bookkeeper cheltenham asset value of $1920. In the second year, however, the full deprecation amount would be permitted, and the full 8% can be expensed. Since the item is already being amortized, the value at the beginning of the second year is $1920 in this example. That means that the 8% amortization rate is applied to the $1920, thus $153.60 is expensed in the second year. [That's 1920 x 0.08]. This leaves an undepreciated value of $1766.40 to start the next year. This continues until the item is fully amortized and there is no value left. As one can see, this can take several years. Acquiring New Assets or Disposing of Assets It is also worth noting that each asset class can have value added to it in each year. AS well, an asset can be sold, quickly changing the value of an asset class. For most bookkeepers in small business it is easier to track each asset separately and simply let the tax accountant group as necessary for tax purposes as well as dealign with any acquisitions or disposals during a year. Be sure to check with the appropriate tax agency for a listing of assets classes and the amortization rates that apply! About the author Johanus Haidner Johanus Haidner (BA, BEd, MBA) is a martial artist, writer, craftsman, artist and life coach in Edmonton, Alberta. Popular stories Shareholder Agreements in a Business Partnership Understanding Polyphasic Sleep Bookkeeping Concepts: Assets & Liabilities http://suite101.com/defining-and-tracking-fixed-assets-in-small-busi-a169520