This is a pretty big topic that can get complex fast, but here are the basics on what fixed assets are and how to track them in your accounting. A fixed asset is an item an organization owns, but the cost of it is spread out over time on their balance sheet. When determining these types of assets, carefully consider these two things:
1. Capitalization Policy
According to your capitalization policy, if your organization buys an item over a certain value that you have established, it will be a fixed asset.
Item over $ = Fixed Asset
If your organization decided that value was over $2,000, then every item less than $2,000 is considered a normal expense on your income statement.
2. Depreciable Life Policy
The depreciable life policy declares how many years a fixed asset can depreciate over time to spread the expense out. Depending on the type of asset—whether it’s equipment, a building, a vehicle, etc.—there are certain year requirements. But for our purposes here, we’ll use a simple example.
For example, let’s say you buy a computer that is $2,000. Its depreciable life policy is five years to spread out the expense.
To figure out your yearly depreciation for the $2,000 computer, take $2,000 and divide it by 5. With a straight-line depreciation, this equals an annual depreciation expense of $400 for that item each year.
So that’s what fixed assets are and how to track them in the accounting for your organization. For more details on capitalization policies and depreciable life policies, check out our other Aplos Short videos.