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In accountancy, assets refer to property that cannot be converted into cash quickly. Fixed assets are tangible assets or property. This indicates that the assets are not consumed or sold in the current accounting year. Fixed assets are different from existing assets. Current assets can be transferred or converted into liquid cash or in the account.
Accounting for Fixed Assets
Fixed assets are tangible assets that cannot be converted into cash quickly. All businesses have these assets similar to investments for doing business efficiently. It is used to produce or provide goods and services to customers. A few examples of fixed assets include servers, laptops, iPads, desktops, computer software like cloud-based applications, enterprise packages, platforms, and fixed internal assets. Further, buildings and facilities, including anything under construction, count as fixed assets. Sometimes, tools, vehicles, and leasehold improvements on lands also become part of fixed assets or properties.
Accounting for fixed assets determines the records of all financial activities related to fixed assets.
Fixed asset accounting is all about understanding how properly the investments and capitalised costs have been made. Accounting for fixed assets is the lifecycle of assets. It is determined by five steps: acquisition, depreciation, revaluation, impairment, and disposition.
- Acquisition: the total purchase cost incurred to bring the asset to the ready-to-use stage, including any shipping price and the cost to ensure an asset’s safety and serviceable function.
- Depreciation: a decline of value to reflect the time, age, longevity, and security of the fixed assets.
- Revaluation: a periodic assessment to assess fixed assets and their current fair market values; the value can go up or down.
- Impairment: a recorded reduction sheet in the fixed value of a fixed asset over the events or circumstances.
- Disposition: the end of the cycle that derives from the selling or scrapping or any other form of disposing of the assets at the end of its service life.
Concept of the Revaluation of Fixed Assets
A company can account for many changes through the revaluation of fixed assets. It is an accounting process that decreases or increases the company’s carrying value of fixed assets. In addition, it helps account for the market changes in the fair market value. Generally, the company’s fixed assets are written in its balance sheet as the cost paid for the asset. Two models are used to account for changes in the values of fixed assets: the cost model and the revaluation model.
Cost Model
The cost model is the most straightforward model to evaluate the company’s fixed assets and cost determination. It carries all the historical costs and accumulated impairment and depreciation losses related to the support. This model does not allow upward adjustment, and its value is based on the assets’ fair market.
Revaluation Model
The second model for accounting is the revaluation model. With the help of this model, a fixed asset can be recorded at its cost by carrying the value of the fixed assets. It depends on the fair market value as well as the increase and decrease in the asset value. The main advantage of this model is that the non-current assets can be shown in the actual market value in the financial year’s statement.
Revaluation of an Asset’s journal entry
Business partners prepare a revaluation account to set the gain or loss on the revaluation of assets. The journal entries for the revaluation of assets are part of the record.
Particulars | Amount (Debit) | Amount (Credit) | |
Increases in the value of asset | Asset account individually | xxx | |
To Revaluation account | xxx | ||
(Being increased in the value of asset on revaluation) | |||
Decrease in the asset value | Revaluation account | xxx | |
To Assets account individually | xxx | ||
(Being decrease in the assets value on revaluation) | |||
Increase in the liabilities amount | Revaluation account | xxx | |
To Liabilities account individually | xxx | ||
Being increase in the liabilities amount on revaluation | |||
Decrease in the liabilities amount | Liabilities account individually | xxx | |
To Revaluation account | xxx | ||
(Being decrease in the amount of liabilities on revaluation) | |||
For an unrecorded asset | Asset account | xxx | |
To Revaluation account | xxx | ||
(Being unrecorded assets recorded in books) | |||
For an unrecorded liability | Revaluation account | xxx | |
To Liability account | xxx | ||
(Being unrecorded liability recorded in books) | |||
Transfer profit on revaluation | Revaluation account | xxx | |
To All Partners’ Capital account, individually | xxx | ||
(Being profit on revaluation transferred to all partner’s capital account in old ratio) | |||
Transfer loss on revaluation | All Partners’ Capital account | xxx | |
To Revaluation account | xxx | ||
(Being loss on revaluation transferred to partners’ capital account in old ratio) | |||
Conclusion
For most businesses, fixed assets are significant capital investments that must be critically accounted for to be applied correctly. This is because fixed assets are capitalised and have benefits in extending them over the years. Therefore, it should be recorded to the cost of acquisition-related to usage. Assets should include all the entities or components of cost. For example, to record the purchase of fixed assets, the product’s debit and credit of purchase price should be the same.
