An asset exists as a resource controlled by a company that has future economic value to the business. Fixed assets consist of items such as land, machinery, equipment, buildings and furniture. Businesses may use an account known as property, plant and equipment to record the purchase and use of fixed assets. A fixed asset appears on a company’s balance sheet. Just like other assets, fixed assets have a normal debit balance. This means debiting fixed assets increases the amount in a fixed asset account. A company must debit fixed assets for the actual cost of the asset. Fixed assets appear on a company’s books for years and will not be consumed in a one- or two-year period.
Review the company’s capitalization limit requirements to ensure the asset meets the company’s definition of a fixed asset. The capitalization limit needed to record an asset as a fixed asset varies from company to company. Some companies may require a fixed asset to have a value of $500 or more, while other companies may require a fixed asset to have a value of $5,000 or more.
In the general journal, write the date when the fixed asset purchase occurs. Locate the date of the transaction from the supplier’s invoice. The date of the fixed asset purchase has added importance for the purpose of depreciating the asset.
Record a debit to the fixed asset account. Write the exact name of the fixed asset. For example, write “Office furniture” or “Land” to indicate the name of the fixed asset. Match the amount of the fixed asset to the amount listed on the supplier’s invoice. Maintain the supplier’s invoice along with the company’s other important invoices and business documents.
Draft a matching credit. If the company pays cash for the fixed asset, credit the cash account to indicate cash was used to pay for the asset. This illustrates a decrease in a company’s cash account. If the company purchased the fixed asset on credit, write a credit to a notes payable account. A credit to notes payable increases a company’s obligation to pay a debt. Instead of notes payable, credit accounts payable if the loan for the fixed asset must be repaid within a one-year time frame.