Back to Basics: Accounting for Assets
Assets versus Expenses
When you process payments into your accounting software the decision must be made there and then whether the payment should be categorized as an asset or an expense.
It is therefore important for the processor to understand what the difference is at the input stage to avoid corrections to be made later or to avoid losing track of assets that was purchased.
How to identify an asset
Assets are resources controlled by a business as a result of past events and from which future economic benefits or service potential are expected to flow to the business.
The most obvious difference between an asset and an expense is that that an asset gives you a long-term benefit whereas an expense gives you only a short-term benefit. Assets are usually used over more than 12 months whereas expenses are used up immediately or over a shorter period.
How to identify if it is an expense
If it is not an asset, then it can be classified as an expense.
In Summary: How to identify an Assets
It is a resource
• Something you can use
• You have control over it
• You have access to it
• Has a value
There was a past events
• It was bought or donated or built
There will be future benefits or service potential
• Services to the company or rentedout of income.
Examples of assets:
• Office equipment
• Furniture and fittings
• Motor vehicles
• Plant and equipment
The Cost of an Asset
What should be included in the cost of an asset
Initial Costs is the costs directly attributable to bringing the asset in its location and condition as intended such as:
• Purchase costs
• Import duties
• Non-refundable taxes
• Less any discount or rebates
• Site preparation and development
• Initial delivery and handling costs
• Installation and assembly costs
Later costs incurred
To capitalise the cost incurred later on an existing asset depends on what it the cost will do for the asset:
Cost will be capitalised if :
It extends the useful life of the fixed asset
It increases the economic value of asset
It Increase capacity/production of asset
If it is an upgrade or refurbishment
Expense the later cost if:
It is incurred to restore asset to a working condition for example fixing or maintaining it.
Asset Register is a record of information on each asset that supports the effective financial and technical management of the assets.
The asset register should also facilitate proper financial reporting.
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