This week, my blog post takes a slightly different format from usual. I was involved in a Q&A session about fixed asset values and balance sheets, and thought it useful to document the questions I was asked and the answers I gave. So here goes ...
Normally you have an account code for the asset at purchase value, then a separate account code for the accumulated depreciation.
Therefore the reported value of the assets at any time is the asset code less the depreciation which is what you can report, but in the background, there should be two separate codes. On the P&L there should be the depreciation for the current year showing each year as you. You also need to know for each item the depreciation amount attributed to each item cumulatively or you can't do the disposal properly. That's usually what is in an asset register.
On Purchase:
- DR Balance Sheet Asset Code Purchase Value £A
- CR Bank account Purchase value £A
- Then at the year-end:
- DR P&L Depreciation code Depreciation for the year £B
- CR BS Depreciation code Depreciation for the year £B
Asset Value in the accounts is A-B
If new items were bought then you would add the price paid and deduct the asset value of any asset that is sold or lost (not the value paid for it if it is sold) in the year of purchase/sale/loss before calculating the depreciation for the year.
When a new item is being bought the full price would be put to the balance sheet to the asset code. Then at the end of the year, you would do the depreciation journal as above, maybe for a part-year amount depending on when it was bought and what your policy is.
When an item is sold (disposed of) you need a few entries to clear the values out of the codes before you do the depreciation for the items that are left. Basically, any amount of money associated with the item being got rid of is all moved into a code in the P&L to record the profit or loss on the item.
- CR Balance sheet asset code the original purchase value £X
- DR P&L Code for disposals of fixed assets £X
- DR Balance sheet depreciation code with the total value the asset has been depreciated during it's lifespan £Y
- CR P&L Code for disposals of fixed assets £Y
- DR bank account for any money you got on the sale £Z
- CR P&L Code for disposals of fixed assets £Z
The balance left on the P&L Code for disposals of fixed assets is the loss or gain you got for disposing of the fixed asset. (X-Y plus Z).
I hope the answer about fixed asset values and balance sheets makes sense, and as always, I'm here to help if you'd like to get in touch, and available for hand-holding sessions should you want me to help you get your figures right in your accounting package.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.