Most companies use fixed assets to service their customers. Company employees work in buildings. Production employees use manufacturing equipment to create finished products. Service employees drive vehicles to customer worksites. Vehicles, buildings and manufacturing equipment all represent fixed assets. Accountants need to consider various stages of the fixed asset life cycle and the accounting issues faced at each stage.
The fixed asset life cycle begins when the company acquires the asset and ends when the company disposes of the asset. The life cycle includes depreciation adjustments, repairs performed and asset upgrades on the asset. Different accounting issues arise throughout the life of the asset, requiring the accountant to make decisions regarding financial reporting or asset value.
Companies acquire assets through various methods. Each method of acquisition raises different accounting issues. Some companies build their own assets -- purchasing materials and using internal employees. This method raises the accounting issue of what portion of employee wages the company should include in the cost of this asset. Some companies purchase new equipment from manufacturers. This method requires the accountant to determine what vendor costs belong in the cost of the asset.
As the asset life cycle progresses, the asset declines in value. The company recognizes this decline in value through depreciation. Depreciation requires the company to estimate the salvage value of the asset and the number of years the company will use the asset. Depreciation also raises the issue of which depreciation method to use.
Repairs and Maintenance
Most fixed assets require periodic maintenance and occasional repairs. Sometimes companies will make more elaborate repairs, which increase the value of the asset and need to be capitalized. Whenever the company performs work on the asset, the company faces the issue of whether to capitalize or expense the work. If the company capitalizes the cost, it needs to determine whether the work changes the estimated life of the asset and the revised value of the asset.
When a company discontinues using a fixed asset, it needs to dispose of that asset. The company can donate the asset, sell the asset or trade it in for a newer model. When a company donates the asset, it needs to determine what value to use on its tax return for the donated asset.