Accounting for fixed assets
All fixed assets are treated as balance sheet transactions in the year that they are acquired, and are posted as an asset to a balance sheet account.
Fixed assets represent permanent value and not just expenditures in the year of acquisition.
Fixed assets are typically depreciated, or expensed, over their useful life. Other adjustments might also be necessary. The most common adjustment, known as depreciation, is an entry that expenses the part of the asset's original purchase price that was used during the year.
Various methods are used for depreciation. One of the methods, straight line, is computed by taking the costs of the acquisition and dividing those costs by the expected service life of the asset. The rules that determine the calculation of depreciation are usually defined in the local legislation.
For all assets, the value of the asset in the balance sheet (net book value) should be reviewed at least one time each year. You can do this monthly, quarterly, semi-annually, or annually. Together with this value review, an adjustment of the asset value in the balance sheet (write-down or write-up) might be necessary.
The write-down or write-up amounts are usually caused by some extraordinary occurrences in the market that affect the price if the company were to reacquire the asset. For example, the increased price of a building might be caused by the real estate market. Accounting principles in some countries or regions prohibit the write-up of assets.
When a company no longer has use for the asset, because it is either being sold or scrapped, the asset must be removed from the accounting books. Therefore, the original acquisition price and accumulated depreciation of the asset are reversed, and any surplus or loss from the disposal is posted to the profit and loss statement.