Recording Fixed Assets and Depreciation in Accounting

You've acquired an asset that may qualify as a fixed asset. This article covers the concepts of fixed assets and depreciation, and explains the related book entries.

This article covers the following topics:

• What is a fixed asset?
• Book entries generated
• Recording a fixed asset in the software
• An error message appears in the Statement of Financial Position

What is a fixed asset?

Definition of a fixed asset

From an accounting standpoint, a fixed asset is an asset that will be used over a period longer than the current accounting period. A consumable supply (such as printer paper) does not qualify, since it is recorded as an expenditure — but a computer, for example, does count as a fixed asset.

There are two main types of fixed assets:

• Tangible fixed assets, which are physical assets such as equipment, vehicles, or real estate;
• Intangible fixed assets, which represent non-physical assets such as software, rights, titles, or patents.

Definition of depreciation

A fixed asset is subject to depreciation, which recognizes its loss in value at the end of each accounting period. This loss may result from use, wear and tear, obsolescence, or the passage of time.

This value is spread evenly over the useful life of the fixed asset, which must be determined upfront. It corresponds to the estimated actual useful life at the time of entry.

Depreciation therefore takes the form of a series of entries spread across multiple accounting periods, allocating the cost of the asset over its useful life. The organization's net result is reduced each year by the amount corresponding to this loss in value.

Book entries generated

Recording fixed assets

When a purchase qualifies as a fixed asset, the resulting entry affects a Class 2 account. You can find these accounts in the Unified Chart of Accounts and add them to your customized chart of accounts from the Accounting > Configuration → Chart of Accounts page.

Click Add an account and select Other accounts, then search for the account you want to add in the field provided.

See this article for more information on customizing your chart of accounts.

Recording a fixed asset is similar to recording an expenditure, except that the account used is a Class 2 account rather than a Class 6 account.

Example entries generated when recording a tangible fixed asset:

Example entries generated when recording an expenditure:

To determine the acquisition value of a fixed asset, exclude any applicable fees, taxes, and discounts received. If you're unsure, we recommend consulting a certified public accountant (CPA).

Recording depreciation

This is also referred to as the depreciation charge — the portion corresponding to the loss in value of the fixed asset.

In accounting, you debit a 68XXXX-type account depending on the nature of the fixed asset.

At the same time, you credit an account that corresponds to the one used to record the fixed asset. If that account was 2XXXXX, you credit the 28XXXX account.

Depreciation charge for a tangible fixed asset over a 6-year useful life:

Depreciation charges are calculated using the straight-line method: cost of the asset divided by its useful life.
If your calculation requires proration or a different method, use the journal book entry.

Recording a fixed asset in the software

Entry via the expenditure/revenue module

To record a fixed asset, go to Accounting > Entry → Record a new expenditure. Select an account that corresponds to a fixed asset (Class 2).

Once a Class 2 account is selected, a Depreciation checkbox appears. Check it to reveal a field where you can enter the estimated useful life (in years).

Upon confirmation, the entry will generate:

• An expenditure entry linked to a Class 2 account;
• A payment entry, if payment has been made;
• As many depreciation charge entries as there are years in the useful life.

All depreciation charge entries are generated at the time of entry, at a rate of one entry per accounting period. You won't need to enter entries for future accounting periods manually.

Opening balance entry for historical data migration

If you recorded fixed assets and depreciation in your previous tool, you can carry them over when switching to the software using the opening balance.

To do this, go to Settings > Accounting → Opening Balance and click the Other (book entry) tab.

You can enter debit/credit amounts for the relevant accounts, as explained above. It is your responsibility to determine which accounts to use based on the nature of the fixed asset.

For the 28XXXX account, you will need to enter an amount corresponding to the number of accounting periods elapsed as of the opening balance date.

The Class 2 entry is not an expenditure and does not affect the net result, so there is no contradiction in entering it in the opening balance. It is the annual loss in value that will impact the result.

For a fixed asset valued at $300 that has already been depreciated over 2 of the 6 planned accounting periods, the amount to enter will be $100.

Here is the entry related to the fixed asset:

And here is the entry related to the depreciation charge:

You will then need to enter the remaining depreciation charges (for the 4 remaining accounting periods) using the journal book entry.

An error message appears in the Statement of Financial Position

Why does this message appear?

If your fixed asset and depreciation accounts do not match (2XXXXX and 28XXXX), a message will appear in the Statement of Financial Position to alert you.
For example, if the depreciation account is 28XXX1, the fixed asset must be recorded under account 2XXX10.

Correcting the entry

Since the account selection is made by the user, it is your responsibility to make the necessary corrections.

If in doubt, we recommend consulting a certified public accountant (CPA).

If there is an error, you can:

• Make a corrective entry using the journal book entry;
• Transfer entries between accounts from Settings > Accounting → Entry Transfer.

We also recommend using the fixed asset option in the expenditure/revenue entry module (detailed earlier in this article) whenever possible. This guided entry mode automatically selects the correct account to use.