Creation and Verification of Fixed Asset Records

The most important element in successful “fixed asset management” is a comprehensive single record of all the information necessary about each individual physical asset. This single record becomes a part of the general accounting system. It must be simple to maintain and update in the normal transaction process.

The concept of a single record is important. If more than one record exists, then they must constantly be reconciled with each other.

If by its construction, however, the subsidiary property record is kept in balance with the general ledger system, then this reconciliation step is eliminated. This can be accomplished by using the same transaction for payment, general ledger, and to create the property record. Perhaps the best way to understand this is to look at a specific example.

Example: If a new truck is purchased to be used for transporting products, there will be an invoice created to pay for that purchase. The document that creates the requirement for payment should also include the accounting information necessary for property record update. The motor vehicle provides us with the best example because of the different facets involved.

 

Information necessary to the general ledger system and accounts payable include payment, total amount owed, motor vehicle license fees included, and terms of payment (immediate, ten days, net thirty days, etc.). If the property record number, description, date of purchase, and intended use are included on the document, this will allow the creation of a property record also.

The creation of the initial property record with the amount paid for the vehicle, its identification number, and a description keeps the ledger record and the property record in balance. Edits in the general ledger system should not allow entry without property record and accounts payable information.

It is not necessary at this time to enter all information about the motor vehicle in the property record, however. The motor vehicle license number is not likely to be known at the time of purchase—this will come at a later date. Having established the initial record of existence of this motor vehicle in the property record provides the means to notify the asset manager that additional information is necessary. The notification should result from the property record update from the general ledger interface.

If the motor vehicle is then taken to a local shop for modification, additional information is necessary. For example: a hydraulic lift gate is to be added to the back of the pickup. Again, an invoice from the auto shop will be received and must be paid. The payment for the lift gate and its installation should include identification of the motor vehicle on which it was installed and the appropriate asset account, if the cost is greater than $1,000. It will cause both the accounts payable system to generate payment and an updated dollar amount to the original cost of the motor vehicle. The lift gate may be an increase to the motor vehicle historical cost or a new property unit may be created.

 

Purpose Of Property Record

The property record file will be used to provide information needed to manage the asset. This information will be the basis for knowing about past investments in assets and planning for future ones. By having the date of placement of all the assets, it is possible to establish the average age and make plans for future required purchases. Control of assets includes knowing the location and current year maintenance expense of each. Appropriate amounts of insurance can be determined from information in the file. It also will provide substantiation for insurance claims. In case of fire, flood, earthquake, or other catastrophe to a building, having a detailed list of physical assets included in the building will provide the means for making an insurance claim.

Where a number of motor vehicles are owned, their annual registration with the state comes due on many different dates. Although some states provide a billing service as a reminder, many do not. Failure to pay registration fees on time can result in significant penalties.

Including in the property record the vehicle registration or license number, amount of the prior year’s registration fee, and the expiration date provides the means to produce a report forecasting the subsequent years’ required registration payments.

Management needs to know the physical condition and capacity of these physical assets on a periodic basis.

 

When including records of maintenance, it is possible to identify weak assets that should be replaced earlier than would be normal. Other information unique to the particular asset may be appropriate. For example, aircraft are required to have inspections on a regular basis. After each 100 hours of operation and annually, the aircraft must be inspected and maintenance performed on any item found outside acceptable tolerances. Maintaining the date and cost of the previous inspections provides information for forecasting the next one. The cost accounting for aircraft operations should include hours of usage and appropriate costs each month. By maintaining that record of hours of use, it is possible to ensure that the next 100-hour inspection is accomplished on time. Also, it is appropriate to forecast the inspection to avoid times when the aircraft will be needed. The aircraft may be out of service for a week or more for the inspection and maintenance.

Similarly, although not required by law, it is possible to maintain a schedule for maintenance of production facilities in a manufacturing plant. The pieces of machinery in a production line can have future maintenance requirements identified based on past records. By including within the property record a forecast of future maintenance, this work can be scheduled during a time when the production facility is not needed.

 

New Concept On Fixed Asset Management

Managing assets through the use of a database has not been done by most companies in the past. The need for better product quality and the greater cost of physical assets has caused a reexamination of these factors. There is now an even higher demand that a production line’s regular maintenance be within tolerance and that the line be capable of producing quality products. High cost of many assets, as well as the cost of financing them, requires that each business get the best use out of its physical assets in order to be competitive. The advent of inexpensive but powerful computers also provides the means to store the great amounts of information that are necessary to manage physical assets.

Although these records, theoretically, could be kept manually in a small business, computer records will be necessary for most. Preprogrammed off-the-shelf packages for maintaining computer asset records within a general ledger system are available. These range from very expensive systems that can be tailored for the individual company to packages available for less than $1,000, which are adequate for most small firms.

The remainder of this post is discussing the details of establishing an asset database. The assumption is that it will be accomplished on a computer; however, records can just as easily be maintained manually if there are only a few assets. The principles that will be discussed are the same, whether the information is stored in a manual file folder for each individual asset or is stored on a computer, which can handle the information more efficiently for large numbers of records. In fact, even the largest business must still have a manual file folder of some sort for each asset that has paper that must be preserved. For example, deeds and easement documents for property and buildings must be maintained in a file, as well as certificates of ownership of motor vehicles and similar assets.

 

Requirements For A Physical Asset Database

The information that is needed within the asset database is as follows:

[1]. Property record identification number

[2]. Account code

[3]. Sub-account code

[4]. Location code

[5]. Property record category number

      – Land
      Land improvement

      – Buildings
      Requirements for a Physical Asset Database 153

      – Motor vehicles

         State vehicle license number

         Manufacturer vehicle identification number

         Registration fee

         Furniture

      – Production equipment

      – Computers

[6]. Description of property record item

– Passenger automobile

[7]. Dollar amounts

– Original cost

– Cost of additions

– Current market value/date value established

– Insurance value/date value established

– Maintenance by year

– Accumulated depreciation

[8]. Usage

– Mileage, date (tachometer)

– Hours of use (hour meter)

 

By having an integrated general ledger and asset management systems, there is a positive control when an invoice is paid with a capital account involved. It is not necessary to code the original invoice with the information in below figure; however, it is possible to include only the property record identification number and the dollar amount at point of payment. This allows the property record management system to create a new record for the item and the dollar amounts so it will balance in the ledger.

Property Record Information 

This process is graphically displayed in the figure below. It is desirable, though, to capture as much information as possible initially. In many cases, all of the information on the document can be coded before the invoices are paid. This coding on the original document should be the responsibility of the purchasing department and they should have detailed instructions in the asset accounting manual telling them how to code a document.

Data Flow For Integrated Ledger 

Someone should be assigned as a physical asset manager. This person will manage the system and answer questions as they arise. This responsibility is best placed in the accounting department and a telephone number or e-mail should be listed, making that person available to answer questions on purchasing. Unique property may require discussions between the accountant, the purchasing agent, and someone in engineering or production with technical knowledge of the function of the piece of equipment in question. Purchase of an integrated production facility, including conveyors and computer-operated milling machines, will require many decisions.

Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

4 thoughts on “Creation and Verification of Fixed Asset Records”

  1. Companies benefit from fixed asset software because their fixed asset management process becomes more automated and complete. Follow up inventories and associated reconciliations are more efficient when using state-of-the-art barcode technology in conjunction with fixed asset software.

  2. Thank you for sharing tutorial about Creation and Verification of Fixed Asset Records. It’s really helpful.

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