Fixed-asset accounting: how the process runs, step by step

Fixed-asset accounting runs as a repeating cycle. A written policy decides what counts as an asset. The register records each item, and finance books additions, disposals and depreciation every period. The register is then reconciled to the ledger and checked against what physically exists. Tax and statutory teams draw on the finished data.

The steps in order

1. Set the rules. The financial controller drafts the capitalisation policy. It covers the threshold below which spend is expensed, the asset classes, useful lives and the depreciation method for each class. The finance director or audit committee signs it off. Everything downstream depends on this document staying current.

1. Build and keep the register clean. A fixed-asset accountant owns the master data. Each record carries a class, cost centre, location, tag number, in-service date and useful life. Requests to create or change a record come from procurement, project teams or sites. The accountant checks each request against policy before saving it.

1. Capture new assets and retire old ones. Additions usually start in accounts payable, when an invoice is coded to a capital account or a construction project. Once the item goes into use, the project accountant asks for it to be capitalised and the entry goes live. Disposals run the other way. A site or operations manager reports that equipment has been sold, scrapped or lost. The subledger owner then removes it, books any gain or loss, and matches sale proceeds with treasury.

1. Handle changes to existing assets. Upgrades that extend life or capacity are added to the original cost. Transfers between departments simply move the record. Transfers across legal entities also need an intercompany entry agreed by both sides. Where policy allows revaluations, an external valuer supplies the figure and the controller approves the journal. Impairment reviews belong here too. They are usually prompted by a business unit flagging an idle or damaged machine.

1. Separate repairs from improvements. Most maintenance spend goes straight to expense through the normal payables flow. The hard cases are borderline invoices, such as a major overhaul. A designated reviewer in the asset team decides whether these belong on the balance sheet.

1. Run depreciation. At each period end the fixed-asset accountant runs the calculation in the subledger and posts the resulting journal to the general ledger. A second person compares the charge with the prior period and investigates swings. These nearly always trace back to late additions, missed disposals or changed lives.

1. Reconcile the register to the books. The preparer rolls forward cost and accumulated depreciation by class: opening balance, movements, closing balance. The closing figures must agree to the trial balance. Construction in progress gets its own rollforward, and stale projects are challenged. The controller signs the reconciliation.

1. Check the assets exist. Facilities or site managers carry out the physical count. They scan tags or walk the floor with a printed listing. Items found but not recorded, and items recorded but not found, go back to the asset accountant to resolve. Missing items are written off once the business confirms they are gone.

1. Feed tax and statutory reporting. The tax team keeps a separate tax book with its own rules. It uses that book for tax depreciation, deferred tax and property tax returns. Statutory reporting takes the rollforward for the notes to the accounts. Regulated businesses may also send asset data to their regulator. All of these users rely on the register being right before they start.

Where practice drifts from the procedure

Written procedures describe a clean flow from invoice to register. In practice, capitalisation often happens in a batch at period end. Someone sweeps the capital accounts and builds records from whatever detail exists.

Disposals are the weakest link. Operations staff rarely think to tell finance when a machine is scrapped. As a result, the register keeps depreciating assets that left the building long ago.

Tagging slips at busy sites. Spreadsheets also creep in alongside the subledger, especially for leases and tax books.

Questions to ask the people who run it

• When a capital project invoice arrives, who decides it is capital, and what do they look at?
• How do disposals actually reach finance? Is there a form, or does the asset team find out at the count?
• Which projects are still sitting in construction in progress even though the asset is already in use?
• When were useful lives last reviewed, and who asked for the review?
• Do any spreadsheets outside the subledger hold depreciation, tax book or lease details?
• What manual journals hit the asset accounts at period end, and why are they needed?
• Who can create or edit a register record, and does anyone check those edits?
• Which differences from the last physical count are still unresolved?

Handoffs worth watching

The riskiest points sit between teams. The first is between payables and the asset team when coding capital spend. The second is between operations and finance when equipment leaves service. The third is between the register and the tax book when lives or methods change. A change to the process that tightens these handoffs usually does more for accuracy than any change inside the finance team alone.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.