Fixed assets represent items a company will use in operations for a long period of time. In most cases, fixed assets must last longer than 12 months. Accounting departments will often follow specific procedures to properly record and report information to the items. Specific processes exist for the different classifications — such as tangible or intangible — and recording the expense of these items as used.
Tangible assets represent the physical items a company owns. These items include property, plant and equipment. The assets are specific to the company’s operations and will typically have specific groups according to type on the company’s books. Intangible assets include items such as patents or copyrights. Government agencies will typically reward these protections for assets developed by a company. These protections act as a specific license to produce an item without the fear of direct competition from copied products.
The relevant cost is the first of three major items necessary to properly account for a fixed asset. Relevant cost includes the acquisition cost, installation expense, professional fees and delivery charges. The company can include all these costs in the general ledger account for the fixed asset. To ensure accuracy, the company can only include costs other than the acquisition cost that relate directly to the fixed asset. Indirect expenditures are period costs and requiring immediate expensing in the current accounting period.
The useful life of an asset represents how long a company expects to use the item in operations. Companies can typically review a classification chart provided by government agencies or governing accounting bodies. These groups provide information on the useful life of assets such as machines, vehicles or buildings. In the absence of a provided classification, companies must list a useful life based on current expected use based on market information.
The residual value is what a company expects to sell the asset for once the company completely uses the asset. Not all assets will have a residual value. For example, if a company uses a delivery truck for 20 years, the value of the truck may be near zero as the asset has little useful life remaining. The residual value also factors into the calculation of depreciation. Companies will deduct the salvage value from the asset’s cost as the residual value is not depreciable.