Accounting for Fixed Assets and Depreciation Methods

Tangible Fixed Assets Definition

Tangible fixed assets are a set of rights and resources intended to remain in the business for more than one financial period.

Types of Fixed Assets

• Tangible-Intangible Assets: These assets have a physical entity but are classified as intangible assets or rights subject to economic evaluation.
• Tangible Assets: These assets have a physical entity and are classified as real or personal property, except those that must be classified in other subgroups.

Understanding Depreciation

Depreciation refers to the systematic allocation of the cost of tangible items over their useful life due to three primary reasons:

1. The use made of these elements, which causes deterioration.
2. The passage of time, whether the asset is used or not.
3. Obsolescence, following the introduction of more technically modern alternatives.

Linear Depreciation Method

The linear depreciation method assumes that the depreciation expense of the fixed asset is constant throughout its useful life. Therefore, the annual amortization charge remains the same.

Key Depreciation Concepts

• Useful Life: This is the estimated number of years the asset is expected to be employed by the company in operational condition.
• Residual Value (Salvage Value): This is the estimated value of the asset at the end of its useful life, after which it is fully amortized.

Accounting Treatment for Fixed Asset Disposal

Sale of Fixed Assets

When an asset is sold, several accounting steps must be followed:

• If the sale occurs prior to December 31st, the corresponding amortization must be calculated from January 1st up to the date of sale.
• The sold item must be physically withdrawn from the asset register.
• Value Added Tax (VAT) must be accounted for (if applicable).
• The accumulated depreciation account related to the sold item must be derecognized (reversed).
• The inflow of money or rights of payment arising from the transaction must be recorded.
• The resulting gain or loss from the sale must be reflected in the income statement.

Loss Due to Incident (Sinister)

In the event of a loss due to an incident (e.g., fire, theft), the loss is recorded in the appropriate expense account (e.g., Account 678, "Extraordinary Losses"). The amount of the loss coincides with the book value of the asset at the moment the incident occurs, regardless of whether the asset is tangible, intangible, or an investment property.

End-of-Life Disposal

When an asset is fully amortized, the company must remove the element from its balance sheet and terminate all associated accounts.

Fixed Asset Valuation Principles

Initial Valuation

The initial valuation is based on the cost, which equals the fair value of the consideration given or received.

Subsequent Valuation

The subsequent valuation is typically carried out at amortized cost or outstanding debt. Accrued interest is recorded in the income statement using the effective interest rate method.