Mike, a CPA blogging at “Accounting Unleashed“, starts out his new series of articles on accounting basics with an article “What Are Assets?“. Assets are “what the company owns”.

Assets are broken down on the balance sheet into categories, depending on how long they are expected to last. Assets which last more than a year should be recorded as “fixed assets“, and their value is adjusted over time as the asset increases or decreases in value.  A common mistake made by those new to accounting is to record the purchase of a fixed asset as an expense, like “computer hardware expense” or “furniture expense”, when by law they are required to record these kinds of purchases as a fixed asset for tax purposes.

Most fixed assets, like computer hardware, furniture, cars, machinery, and other equipment loses value over time, because people won’t pay as much for second-hand stuff, and it eventually wears out or becomes obsolete; when these assets are reduced in value the business may record a tax-deductible “depreciation expense”.  The tax laws in your area will have specific rules about the percentage of a fixed asset you can claim as a depreciation expense each month, for tax purposes.

Some fixed assets, like land, buildings, or precious metals and stones, may fluctuate in value, which means that instead of a tax-deductible expense, you will be required to report a taxable “capital gain” as part of your income for that year.

Another type of asset that deserves special consideration is the “pre-paid” asset, such as pre-paid insurance.  Like a fixed asset, you should not record pre-paid insurance, pre-paid rent, or other pre-payments as a tax-deductible expense, except in the tax year that the payment applies.  For example, if you pay a year’s worth of insurance halfway through the year, you can only report half of that as tax-deductible in that year; the other half you must report on your tax return in the following year.  The part that’s left for the next year would be put into an asset called “pre-paid insurance.”

To learn more, read the article which inspired this one:

Accounting Basics: What are Assets

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This entry was posted on Monday, July 14th, 2008 at 11:34 am by Dobes and is filed under Accounting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.