A fixed assets capitalization policy is an essential part of the accounting guidance system that works in the organization.
Every company should devise fixed assets capitalization policy as it will guide the accountants to work exactly as per the requirements of the company.
Although, there are accounting rules that need to be followed, yet the management can maneuver the fixed asset capitalization policy to maximize the benefit for the company. Here are the five points to cover the fixed assets capitalization policy.
What will qualify as a fixed asset in the capitalization policy?
The first thing a fixed asset capitalization policy should guide is what should be considered a fixed asset.
There can be two options to determine if the asset is a fixed asset or not.
The first is the number of years it will be used and the second is the price of the asset. If the period of usage is long and the price tag is high then it should be considered a fixed asset.
However, one item can mean different for different companies. A new copier can instantly become a fixed asset for a copying small business.
However, in the multi-million dollar project, a new copier can be placed in expenses to avoid unnecessary accounting procedures.
Why fixed assets capitalization policy should be implemented?
It is critical for the success of any organization to have a standardized accounting procedure in place. A fixed assets capitalization policy provides the essential consistency that is the key to a correct accounting system.
This consistency can exponentially increase the correct reports and predictions with the help of accounting systems.
Fixed assets capitalization policy is also a great tool for reducing the recordkeeping expenses in terms of financial and time conservations.
It can also be proved as a great tool to be used in defense of the government inquiry about the business due to any circumstances.
The biggest reason that fixed assets capitalization policy should be implemented is that it provides the basis for constructing a capital asset budget.
How fixed assets are accounted for?
Fixed assets are capitalized in the balance sheet to accurately report the financial situation of the business. To understand how fixed are accounted for, we have to understand how expenses are accounted for.
The expenses of every year like marketing expenses etc provide the benefit for that particular time so they are accounted for that particular time against the profit of that time.
The same is the case with fixed assets. Life of fixed assets is multiple years however a small portion of the value of the fixed asset is expensed every year to account against the income of that year.
Standard rules of accounting and government requirements
There are always limitations in the fixed assets capitalization policy. One cannot simply devise the own of calculating depreciation. He must have to opt from the standard methods of calculating depreciation.
The same is the case with government requirements. It is illegal to dodge the government requirements with the help of fixed assets capitalization policy.
How capitalization of fixed assets will work?
Fixed assets are placed on the assets category in the balance sheet and this process is called capitalizing the fixed assets. Accountants use standardized sets of rules for this process.
It works in pretty simple terms. As explained above, that life of assets is multiple years and a small portion is put into expenses every year, the same will be recorded in books.
The expense of the asset for a particular time is called depreciation and can be calculated by various methods as guided by fixed assets capitalization policy.
This depreciation expense decreases the value of the fixed asset in the balance sheet and that decrease can be reflected in the income statement under the head of depreciation expenses.