FIXED ASSETS: Acquisition, Depreciation, Disposals

Fixed assets are long-term tangible resources used in business operations. They are capitalized at purchase, depreciated over their useful life, and removed from the books when disposed or retired.

1. What Are Fixed Assets?

Fixed assets (also called property, plant, and equipment — PP&E) are physical assets held for use in production, supply of goods or services, or for administrative purposes, and are not intended for resale.

Common examples:

• Buildings

• Machinery

• Vehicles

• Equipment

• Land (non-depreciable)

2. Acquisition and Initial Recognition

Fixed assets are recorded at cost, including:

• Purchase price

• Delivery and installation costs

• Site preparation

• Taxes and legal fees (non-refundable)

• Direct labor or materials to bring the asset to use

Journal entry at purchase:

• debit Fixed Asset (e.g., Equipment)

• credit Cash or Accounts Payable

Example:

Buy equipment for $50,000 and pay $2,000 delivery and setup:

• debit Equipment ............................................... 52,000

• credit Cash or Payables ................................... 52,000

3. Depreciation of Fixed Assets

Depreciation systematically allocates the cost of an asset over its useful life (except land).

Common methods:

• Straight-line

• Double-declining balance

• Units of production

Straight-line formula:

(Cost – Salvage value) ÷ Useful life

Example:

An asset costing $20,000 with a 5-year life and $2,000 salvage value:

Depreciation = ($20,000 – $2,000) ÷ 5 = $3,600/year

Journal entry:

• debit Depreciation Expense

• credit Accumulated Depreciation

4. Accumulated Depreciation

This is a contra-asset account linked to the fixed asset. It reduces the book value of the asset on the balance sheet.

Balance sheet presentation:

• Equipment ................................. $20,000

• Less: Accumulated Depreciation ... (10,800)

• Net Book Value .......................... $9,200

5. Disposals and Retirements

When an asset is sold, scrapped, or fully depreciated, it must be removed from the books.

If sold for cash:

• debit Cash

• debit Accumulated Depreciation

• credit Fixed Asset

• record gain or loss

Example:

Equipment sold for $5,000

• Original cost: $20,000

• Accumulated depreciation: $15,000

• debit Cash ................................................. 5,000

• debit Accumulated Depreciation ............. 15,000

• credit Equipment ...................................... 20,000

• credit Gain on Sale of Equipment ............ 0 (no gain or loss)

If proceeds ≠ net book value, recognize a gain or loss.

6. Asset Impairment (IFRS & GAAP)

An asset must be tested for impairment if indicators exist (e.g., damage, decline in market value).

Impairment loss = Book value – Recoverable amount

• debit Impairment Loss

• credit Fixed Asset or Accumulated Depreciation

7. Disclosures

Companies must disclose:

• Depreciation methods and useful lives

• Gross cost and accumulated depreciation

• Reconciliation of opening and closing balances

• Impairment losses, if any

Key take-aways

• Fixed assets are capitalized at acquisition cost and depreciated over their useful life.

• Depreciation reduces asset book value and matches cost to revenue.

• Disposal entries remove both the asset and accumulated depreciation.

• Impairments must be recognized when value declines below recoverable amount.