The accruals concept dictates that incomes be recognized when earned or due and not when they are received. Similarly, expenses are incurred when goods or services are received and not when payment is made. Fixed assets result from capital expenditure. At the end of the year, entries for acquisition, depreciation, conversions and disposal of fixed assets should be passed in accordance with the accruals concept so as to reflect the true status of the fixed assets accounts during the financial period.
Write off the depreciation of fixed assets. Two entries are required for depreciation; one is the depreciation expense and the other is accumulated depreciation. Depreciation expense is transferred to the profit and loss statement while the accumulated depreciation is posted to the balance sheet to show the net value of the fixed assets. Fixed assets are acquired at cost. The depreciation expense is spread out to cover the assets useful life. Create a depreciation schedule to capture the depreciation expense for every category of fixed assets.
Raise proper entries to recognize capital expenditure incurred in the acquisition of fixed assets. Some assets are paid for in full while others, especially those that involve large sums of money, are partly paid. Corporate firms enter into agreement with banks and other financial institutions to finance assets, such as aircraft and ships. At the end of the year, such acquisitions constitute additions to fixed assets. Regardless of whether an asset is fully paid or not, it is reflected in the books at total cost.
Write off assets disposed of by the company at the end of the financial period. A company may decide to do away with fixed assets because of old age or obsolescence. In such a circumstance, the year-end adjustments will have to acknowledge this movement. The affected fixed asset account is reduced with the cost of disposed asset. Accrued depreciation expense is then estimated and written off accordingly, particularly if the asset was disposed midyear. Accumulated depreciation of the disposed asset is also removed. The net effect is that the fixed assets schedule is left with figures relating to assets still in a company’s possession.
Recognize the conversions of assets or expenses made by your company within the financial period in the end of year accounts. Based on the policies set about by a company, some expenditure may need to be capitalized or the company may want to treat some acquisitions of assets as expenses. The threshold of capital expenditure varies from one organization to another. It also depends on the size of the organization, among other factors. All the same, where a conversion is being made, a journal entry will be passed at the end of the year either capitalizing an expense or treating an asset acquisition as an expense.
Consult a certified public accountant to assist in accounting for accrued fixed assets.
Alphonse Lameck is a tutorial fellow based in Kenya, where he specializes in the field of management. He holds a Master of Arts in practicing management from McGill University, as well as a bachelor's degree in international business administration from United States International University.