Successful management of businesses requires more than just recording the profits and losses of a business on a daily basis. As businesses expand, they acquire fixed assets in the form of computers, machines, office furniture, automobiles, and other types of equipment. Fixed assets play an important role in running a business smoothly, but the assets need to be managed properly.
As opposed to expenses, the management of fixed assets is done in a different way because they add value to businesses over a period of years. The expenses related to depreciation of fixed assets should also be considered by business owners. Small business bookkeeping services come in handy in such cases.
What Counts as a Fixed Asset for Small Business Bookkeeping Services?
Fixed assets are those assets acquired by the company to be used in its operations and not for sale. These assets are meant to last beyond one accounting period.
As compared to inventories, which are meant to be sold to customers, fixed assets help the business in its ongoing activities.
Examples include:
- Office furniture
- Computers/laptops
- Vehicles owned by the company
- Factory machinery/equipment
- Machines
- Building
- Improvements to land
- Business property
- Office equipment
- Security equipment
In accounting practices, when such assets are acquired by the companies, small business bookkeeping services list them in the balance sheet and not as expenses.
The Difference Between an Expense and a Capitalized Asset
Another common question about accounting is whether a purchase is an expense or a capitalized asset.
An expense can be defined as a cost that provides benefit for the business during the accounting period. Examples are:
- Office supplies
- Utilities payments
- Internet connection
- Advertising
- Repairs
Expenses are written off during the period they are made.
A capitalized asset, in its turn, is the one which brings value for several accounting periods. The cost of the purchase is not written off at once; it is capitalized and depreciated.
For example:
- Purchase of printer paper is an expense.
- Purchase of a business printer is a capitalized asset.
Why Accurate Fixed Asset Tracking Matters
As an organization expands, it tends to have numerous or even hundreds of long-term assets.
The absence of adequate fixed asset trackingmay lead to difficulties like:
- Duplicated purchases
- Missing items
- Wrong depreciation computations
- Expense overstating
- Incorrect financial statements
- Tax problems
With professional accounting services, all eligible assets will be registered with information including:
Purchase date
- Cost of purchase
- Vendor details
- Asset classification
- Useful life estimate
- Depreciation approach
- Book value
Detailed documentation will enable organizations to track investments and facilitate year-end accounting.
How Small Business Bookkeeping Services Calculate Depreciation
Depreciation is the loss of value of assets through time.
The expenses related to the acquisition of assets are not charged all at once but spread over time. This method adheres to the matching principle in accounting, where expenses and revenues are recorded in the same period.
Suppose a company acquires equipment worth $15,000 that will be used in the company for five years. In this case, the company does not charge the entire $15,000 in the initial year as an expense.
Small business depreciation methods provide more realistic figures of financial statements by spreading expenses.
Common Depreciation Methods Explained
There are several methods of calculating depreciation, but there are two common depreciation methods that are usually faced by small businesses.
Straight Line Depreciation
The straight line depreciation method is the simplest and most popular method of depreciation.
In this method, the asset depreciates by an equal amount each year.
For example:
Cost of the asset: $12,000
Useful life: 6 years
Depreciation each year would be:
$12,000 ÷ 6 = $2,000
This method is easy to calculate and ensures consistency of expense recognition each year.
Businesses use a straight line depreciation method due to its simplicity and predictability.
Accelerated Depreciation
Accelerated depreciation calculates the higher amount of depreciation in the early years.
It is assumed in accelerated depreciation that many assets depreciate faster when they are new.
Hence,
Depreciation is high in the initial years and low in later years.
How Bookkeepers Manage Fixed Asset Records
The management of fixed assets is not just about recording the cost of acquisition.
During the lifecycle of the asset, companies may have to:
- Upgrade the equipment
- Sell the asset
- Discard the asset
- Move assets from one place to another
- Replace the old equipment
Professional small business bookkeeping services keep proper records of such activities through fixed asset registers.
Some of the things included in a fixed asset register include:
- Asset identification number
- Description of the asset
- Cost of purchase
- Date of purchase
- Accumulated depreciation
- Carrying amount
- Information regarding disposal of asset
How Depreciation Affects Financial Statements
Depreciation affects various important financial statements.
Income Statement
Depreciation is recorded as an operating cost.
Even though it decreases profit, there is no actual cost after buying the asset.
Balance Sheet
The original asset is shown in the balance sheet whereas the accumulated depreciation decreases the book value.
This reflects the real value of the asset.
Cash Flow Statement
Depreciation is classified as a non-cash cost.
Although it decreases the profits, it does not affect the cash flow at all.
These insights will help the business owner understand financial statements better.
Why Fixed Asset Tracking is Important for Your Tax Return
Fixed asset tracking becomes crucial in tax season.
If the business lacks the necessary record keeping, it might:
- Miss valid deductions
- Overestimate costs
- Underestimate assets
- Experience delays in filing taxes
- Increase the risk of being audited
Bookkeepers arrange the data about assets so that accountants could prepare tax returns.
Furthermore, it ensures that there will be enough documentation in case of an audit.
Record keeping will make the tax filing process much easier throughout the year.
Common Mistakes Businesses Make
It is not uncommon for many small businesses to make mistakes in recording their fixed assets.
Recording Expensive Equipment as Operating Expenses
Many businesses expense their expensive equipment immediately upon purchase instead of capitalizing them.
This could result in distortion of their financial statements.
Overlooking Business Assets
Due to lack of record keeping, many companies tend to forget about the equipment that they already have.
This could result in unnecessary purchases.
Variable Depreciation
Different calculation of depreciation per annum will render their financial statements incorrect.
It is vital to be consistent.
Problems with Proper Documentation
Lack of invoices, dates of purchases, and vendor names could create problems while preparing taxes.
Professional bookkeepers will help you avoid these problems.
Best Practices to Manage Fixed Assets
There are certain best practices that businesses can adopt in order to keep track of their fixed assets.
Create an Asset Register
It should be a comprehensive list of all of your business assets.
Do Regular Reviews
Regular review of the assets would help you recognize any old and unused pieces of equipment.
Make a Distinction Between Maintenance and Asset Purchase
Normal maintenance of your equipment would be different from its purchase.
Keep Proper Documentation
Store the given documents:
- Purchase invoices
- Warranty information
- Receipts
- Financing documents
Good documentation simplifies bookkeeping and tax preparation.
How Technology Improves Fixed Asset Tracking
Fixed asset tracking has been made much easier through accounting software.
Many accounting software programs automatically:
- Record dates of purchases
- Determine depreciation values
- Create depreciation schedules
- Prepare financial statements
- Record history of assets
The use of such software reduces the need for manual calculations and increases the precision of reporting.
How Small Business Bookkeeping Services Support Business Growth
As business operations grow bigger, financial management becomes more complicated.
Professional bookkeeping services for small businesses offer continuous assistance through:
- Accounting for the fixed assets
- Depreciation calculation
- Organization of the financial documentation
- Assistance in tax preparation
- Enhancing reporting efficiency
- Financial planning
The correctness of bookkeeping will allow entrepreneurs to know their financial situation and make good investments.
Entrepreneurs do not need to spend much time managing accounting documentation and can concentrate on developing their business, having a guarantee that their financial documentation is correct
Managing the long-term assets of any business involves not just accounting for its acquisitions. Proper management of the fixed assets, depreciation accounting, and financial organization are essential factors for successful business financial health.
Professional bookkeeping services for small businesses offered by The Fino Partners assist business organizations to properly identify expenditures and capitalized assets, to calculate depreciation correctly, and maintain accurate financial statements for all year long. All these activities not only enhance financial reporting but also simplify tax preparation.
When businesses invest in equipment and technology and other long-term assets, it becomes crucial to have an organized bookkeeping. It provides financial visibility, effective decision-making ability, and a proper basis for further development of the business.
