How to Account for Fixed Assets With GAAP

The U.S. Securities and Exchange Commission (SEC) uses generally accepted accounting principles (GAAP) as part of its standards when dealing with business and corporate accounting matters. And so do many other for-profit and non-profit U.S. organizations. So, it would be best to learn everything you can about GAAP and how you can use it to account for fixed assets within your financial reports.

What Are Fixed Assets?

Generally, fixed assets refer to tangible assets that a business may own for the production of goods or services. However, these assets are limited to those that businesses cannot convert easily into cash since they are meant for long-term use.

Also, fixed assets are “fixed” in the sense that a business will not consume, sell or use them up within the current accounting year. As a result, they are also considered noncurrent assets. And companies that purchase them indicate their management has faith in the company’s long-term financial health.

Fixed assets come in three primary assets types, which are usually summarized as PP&E:

  • Property:​ These include a business apartment for rent, land and office furniture, etc.
  • Plant:​ These include all the manufacturing facilities a company may own, etc.
  • Equipment:​ These include trucks and forklifts for product transportation and delivery, manufacturing machinery, etc.

Depreciating Fixed Assets

The ability to depreciate qualifies as one of the characteristics of fixed assets. In this case, depreciation enables you to allocate the asset costs to your business operations over the useful life of that asset.

It is worth noting that an asset’s useful life is its service life and not necessarily its physical life. The management gets to determine that value. And it depends on various things such as the condition of the asset upon purchase, expected use and obsolescence, past business experience and the type of asset you are accounting for. However, land cannot be depreciated unless it contains natural resources that are depleted over time.

For example, you could decide to set the useful life of your company vehicle at five years. If it would still have some value at the end of the asset’s useful life, you must factor that value in your calculation. But if you intend to trade or sell the company car, you need to estimate its trade-in value at the end of the five years. And then, you should subtract that value from the asset cost before depreciating it over five years.

Over time, your fixed asset will acquire accumulated depreciation, the total value of depreciation charged to the expense since you obtained the asset in question. It’s meant to increase each year until the end of the asset’s useful life.

Because GAAP dictates that your business expenses must align with the accounting the business revenue is generated, depreciation enables you to expense part of your fixed asset’s value over its useful life.

Recording GAAP Fixed Assets

GAAP dictates that you record fixed assets at their full acquisition costs, including the cost of purchasing the products (except software) and bringing them to the condition or location that enables them to become useful.

When recording GAAP fixed assets, you will list them under noncurrent assets, which come after the current assets category in your balance sheet. And you will do so by labeling them as PP&E. And your fixed asset’s accumulated depreciation value will show up under the PP&E line in that same section and sheet.

Using Straight Line Depreciation

Below is the procedure for accounting for GAAP fixed assets using straight line depreciation.

Write down a list of all your fixed asset types and record their values on their purchase dates as individual journal entries. Debit the asset account with the value of the fixed assets. And also credit the cash for similar values.

If you spend time improving the fixed asset, calculate its new value. And then debit that value increase to the fixed asset account while crediting the cash section with a similar amount.

Using straight line depreciation, calculate the accumulated depreciation by subtracting the final trade-in cost of your fixed asset from its full acquisition cost and then divide the result by its useful life.

If you choose to sell the fixed asset, you will debit the total sale amount and the accumulated depreciation at that point. In addition, you would credit the fixed asset full acquisition cost. If you sold the asset at a price higher than the original value, you should also credit the gain. But if you made a loss, you should debit it.

Looking at an Example

Suppose you bought a truck at $20,000 and improved it by $1,000. Its total acquisition cost is $21,000. And then you choose to assign it a useful life of seven years, after which its estimated trade-in value will be $7,000.

In that case, it will depreciate by ($21,000-$7,000)/7 = $2,000 per year. So if you are accounting for accumulated depreciation, you will debit depreciation and credit accumulated depreciation each financial year at $2,000. And after one year, the truck will have a value of $19,000. At year two, the truck would have a value of $17,000 while the accumulated depreciation would increase to $4,000, etc.

So, to find out the net value of fixed assets at any point, all you have to do is subtract the total accumulated depreciation from the property, plant and equipment values under the assets category within any financial report. That would give you a better idea of how much faith the management has in the company it runs.