What Are the Fixed Assets?
Fixed assets are generally referred to as the property, plant, and equipment that own and use by the company to support its daily business operations. They do not help for the purpose of trading. These assets could refer to the land that the company owns and use to build the office building.
The office building and warehouse that the company uses for running the daily operation and storing the goods and materials. Computers and printers are also considered fixed assets since their value and useful life are high and could be used for more than one year.
When the company purchases these kinds of assets and they are assessed as ready for use, the company is required to recognize them on its balance sheet.
And when the assets are no longer needed since they could not be used and considered as not generating any benefit to the company. The company could consider writing off or disposal.
So, what is the difference between the write-off and disposal of assets?
Write-off fixed assets happen when the company removed the assets from its book due to a number of conditions including, assets no longer existing, assets no longer generating benefit to the company, and the value is considered as scrap or salvage.
The remaining book value will be written off as expenses in the profit and losses. Disposal of fixed assets, on the other hand, is the sales of the fixed assets at the higher or lower than its netbook value based on a number of reasons that are factored by the company’s policies including the consider of fixed assets and their useful life.
The disposal of fixed assets will result in losses or gain on disposal depending on the value of sales proceed and the net book value of fixed assets.
Write off Fixed Assets
A fixed asset is written off when it is decided that there is no further use for the asset or when they are confirmed as losses. It means that assets would not be able to generate any economic benefit or value for the company. The value of those assets is only at salvage or scrap value.
And write-off also specifically refers to removing or derecognizing the asset from the fixed assets register and statement of financial position at zero value.
In some cases, write-off fixed assets are interchangeably used with the disposal of fixed assets by accountants. Yet, they are different.
For instance, the business eliminates or write-off fixed assets without receiving any payment in return.
This is a general scenario where the fixed asset is scrapped because it is obsolete or no longer in use. Further, there is no resale value to it. Let us take an example for accounting purposes:
Sinra Inc buys a machine for $200,000 and recognizes $20,000 of depreciation each year for the next 10 years. At the end of 10 years, the machine is fully depreciated and ready for scrappage.
Sinra Inc gives away the asset free of cost and should record the following journal entry:
|xx||Accumulated Depreciation (Machinery)||$200,000|
Another way to write off the asset is by providing for a reduction in the asset’s carrying value.
This amount is usually charged to expenses as it is considered the cost of doing business. The term writes off refers to the value of the asset. The amount is written off and not the asset itself.
Disposal of the fixed asset
Generally, discarding involves writing off assets too. However, when we study the meaning deeply, these are two different terms and have different accounting implications.
Disposal of fixed means discarding the fixed asset from the performance to create any value. Further, disposal has a bit more complicated procedure than purchases.
A form for disposal shall be filled out while disposing of the assets. It shall contain details such as:
- Description of the asset disposed of
- Reason for disposal
- Financial year originally acquired
- Method of disposal i.e. sale/scrap/part exchange/other
- Value received for a disposed asset
- Sales invoice number and asset id
- Sale of an asset again
There are three scenarios where assets are disposed of
A) Sale of Assets at Gain/Loss:
Let’s say Sinra Inc sells machinery of $200,000 for $70,000 cash after having completed $140,000 of accumulated depreciation. The requisite journal entry would be:
B) Part exchange of assets:
Sinra Inc replaces asset A which has an original cost of $80,000 and accumulated depreciation of $40,000 with another asset B which has a fair market value of $50,000.
In such a scenario, the accounting standards come into place which say the asset which has more evident value shall be recorded at its value. The journal entry would be:
Controls and Processes:
Even though fixed assets are not considered sensitive assets that could easily convert into cash.
And the fraud risks of losing fixed assets are low in general compared to cash, but the entity should have proper control and process to make sure that the assets are correctly written off or disposed of for the company’s benefit.
Management or staff should not gain the benefit from this write-off or disposal at the company’s costs.
There is a number of controls that generally apply to prevent such risks. Those controls include:
- Set an authorization matrix or approval matrix to make sure that only authorized persons could approve to write off or dispose of.
- Physical inspection should be performed to confirm the condition of assets.
- A regular physical count of assets belonging to the entity should be performed to ensure that assets are not a loss for any reason including abuse of power by management on assets write-off or disposal. Sometime management might write off assets that have value more than the right that the board gives to them. And sometimes the disposal process is not for the company’s benefit. For example, assets are disposal to staff or relatives at the price that should be. Or the income from sales of fixed assets is not recorded or reported to the company.
- Maintain assists listing and regularly update.
- Ensure that assets that are written off or disposed of are reflected in accounting records.
- Having an internal audit to regularly review the execution of write-off or disposal and report the result to the board.