Introduction to Fixed Assets (Grade 12 NSC Matric Accounting): Revision Notes
Introduction to Fixed Assets
What are fixed assets?
Fixed assets are long-term resources that businesses purchase not for resale, but to support their daily operations and help generate profits over time. Think of them as the "tools of the trade" - items like machinery, buildings, vehicles, and equipment that a business uses to run its operations year after year.
Unlike inventory or stock that businesses buy to sell quickly, fixed assets are investments that businesses plan to use for extended periods.
Real-World Example: A bakery's ovens, delivery trucks, and shop building are all fixed assets because they help the business operate and earn money over many years, rather than being sold to customers.
Recording fixed assets at cost price
When businesses purchase fixed assets, they must record them using the cost price method, which is also known as the historical cost principle. This is a fundamental rule in Generally Accepted Accounting Principles (GAAP).
The cost price represents the actual amount paid to acquire the asset, including any additional costs needed to get the asset ready for use. This means businesses record exactly what they paid for the asset, regardless of what the asset might be worth later on.
Worked Example: Recording at Cost Price
If a business purchases a delivery truck for R25,000 and spends an additional R2,000 on modifications to make it suitable for business use, the total cost recorded as a fixed asset would be:
Cost Price = Purchase Price + Additional Costs to Ready for Use Cost Price = R25,000 + R2,000 = R27,000
The asset register system
Every business must maintain detailed records for their fixed assets using an asset register. This register serves as a comprehensive database containing:
- Complete details of every asset owned by the business
- Purchase dates and costs
- Depreciation calculations for each financial year
- Current values and conditions
The asset register must be kept current and accurate at all times. This systematic record-keeping ensures proper financial reporting and helps management track the business's valuable resources effectively.
Depreciation methods
Fixed assets lose value over time due to wear, tear, and obsolescence. Businesses account for this decline through depreciation, using several approved methods:
- Straight-line method: Spreads the asset's cost evenly over its useful life
- Carrying value method: Also called the diminishing balance or book value method, which applies a fixed percentage to the asset's remaining value each year
The choice of depreciation method affects how much expense the business records each year, impacting both the Income Statement and the asset's book value.
Monitoring and internal control
Regular monitoring of fixed assets serves important internal control purposes. Businesses must:
- Physically verify that assets still exist and are in good condition
- Update asset registers with any changes in condition or location
- Ensure assets are being used efficiently and properly maintained
- Prevent theft or misuse of valuable company resources
This ongoing oversight helps protect the business's investments and ensures accurate financial reporting.
Asset disposal procedures
When a business sells or disposes of a fixed asset, specific procedures must be followed:
- The asset register must be updated immediately
- Any additional depreciation up to the disposal date must be calculated
- The asset's details must be marked as "sold" or "disposed"
- The asset is then removed from the business's records since it no longer belongs to the company
Proper disposal procedures ensure that financial statements accurately reflect what the business actually owns.
Year-end depreciation procedures
At the end of each financial year, businesses must:
- Calculate and record depreciation on all fixed assets owned during the year
- Include depreciation on any assets sold during the year (up to the sale date)
- Report the total depreciation expense in the Income Statement
This year-end process ensures that the business properly accounts for how its fixed assets have decreased in value over the accounting period.
Key Points to Remember:
- Fixed assets are purchased for long-term use in business operations, not for resale
- All fixed assets must be recorded at cost price (historical cost) following GAAP principles
- An asset register must be maintained with complete, up-to-date records for every fixed asset
- Depreciation methods include straight-line and carrying value (diminishing balance) approaches
- Regular monitoring serves internal control purposes and protects business investments
- Proper disposal procedures and year-end depreciation calculations are essential for accurate financial reporting