Maximize Your Wealth and Power: Master Fixed Asset Management

The importance of a fixed asset policy and tracking system

As a small business owner, it’s essential to have a fixed asset policy to ensure consistent and accurate accounting of your fixed assets. Without a policy in place, it’s easy to set up different useful life depreciation types and salvage values for every asset, which can lead to confusion and errors.

Asset classifications and useful life figures

We recommend creating classifications of fixed assets, such as buildings, furniture and fixtures, vehicles, computer hardware, and production equipment. By assigning a standard useful life and depreciation method to each classification, you can ensure consistency and make it easier to calculate depreciation accurately. It’s essential to keep the number of classifications relatively simple; ten or fewer should be sufficient, and more than 20 should be questioned.

Depreciation methods and consistency of application

Generally an average of your company’s experience with its own assets is useful to calculate the useful life figure, and rounding up to the nearest whole number, such as four years for computer hardware. Regarding depreciation methods, the speaker prefers the straight-line method to avoid skewing performance ratios like return on assets, but the decision is ultimately up to the business owner. Whatever method you choose, consistency of application across all fixed asset classifications is key to accuracy.

Salvage values and capitalization thresholds

Salvage values vary by individual asset, but you can apply a flag to each classification that either allows the application of salvage values or doesn’t. For instance, building assets and equipment assets probably have significant salvage values, while furniture, computer hardware, and computer software likely don’t.

Another essential aspect of a fixed asset policy is to include a capitalization threshold, which represents the dividing line between charging an asset purchase directly to expense or recording it as a fixed asset. The threshold should be set based on a common-sense judgment about which purchases you want to keep track of over the long term. A really small firm might set the capitalization level as low as $1,000, while others might use $2,500 or $5,000. A larger firm might decide that $10,000 works for them. The exact amount will vary by company, but it’s crucial to be consistent with the decision.

Handling large asset purchases on a single invoice

Lastly, it’s important to decide what to do with a large number of assets purchased on a single invoice. For instance, you could buy 10 laptops for your employees all at once. The fixed asset policy should specify how to handle these types of situations. We recommend breaking down the invoice by asset and assigning each asset a unique identifier, such as a serial number, and then classifying them according to the fixed asset policy.

Once you have established your fixed asset policy, it’s essential to implement a tracking system to manage your fixed assets effectively. You’ll need to keep track of all assets purchased, their classification, acquisition date, original cost, useful life, depreciation method, and salvage value. You should also keep track of any improvements made to the asset, such as renovations or upgrades.

Implementing a tracking system

A common tracking system is to use a spreadsheet or a dedicated fixed asset tracking software. A spreadsheet can work well for small businesses with only a few fixed assets. However, as your business grows, a dedicated software solution becomes a better option.

The fixed asset tracking software can help you manage all aspects of your fixed assets, including asset purchase, disposal, and maintenance. Some software even includes mobile apps that allow you to scan barcodes or QR codes to quickly add assets to your inventory. The software can also generate reports, such as depreciation schedules, asset value summaries, and asset disposal records.

Performing periodic physical inventory counts

In addition to tracking your fixed assets, it’s crucial to perform periodic physical inventory counts to ensure that the assets recorded in your tracking system match the assets you have on hand. This process helps identify any discrepancies between the recorded and actual assets and can help prevent fraud or theft.

Ensuring effective fixed asset management for small businesses

In conclusion, having a fixed asset policy and tracking system in place is crucial for small businesses to ensure consistent and accurate accounting of fixed assets. By establishing a policy that includes asset classifications, useful life figures, depreciation methods, salvage values, and capitalization thresholds, you can ensure that your fixed assets are managed effectively. Implementing a tracking system, such as a spreadsheet or dedicated fixed asset tracking software, can help you manage all aspects of your fixed assets, including asset purchase, disposal, and maintenance. Performing periodic physical inventory counts can help identify any discrepancies between the recorded and actual assets and can help prevent fraud or theft. By taking these steps, you can ensure that your fixed assets are effectively managed and contribute to the success of your small business.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule a discovery session here, and we’ll be able to address these issues and much more! We’re looking forward to opening many more doors for you!

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This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed

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This post is intended for educational and informational purposes only and should not be construed as legal or tax advice to your situation. Each individual’s personal and business situation is unique, what is represented here may not fit with your facts and circumstances. Additionally tax laws are subject to change, and what is represented here may not be valid in the future. Please consult a tax or legal professional for advice on your specific situation, so they tailor a solution that incorporates the recent laws and satisfies your needs legally.

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