As your business grows you are likely to purchase assets which in turn will mean that the depreciation will start to become a part of your accounting (or accountants) life.
Knowing the value of what you own (and its replacement cost) is critical for making sure you have adequate insurance in place and that you understand the true value of your business.
There are a host of ways to manage depreciation and fixed assets. All too often when we are looking at established businesses we find that their asset register (the list of the assets and how much they have already been depreciated) is woefully out of date, and often contains items that no longer exist (sold or thrown away) or which may still have a 'real' value even if they have been fully depreciated in the books.
So, how do (or should) you control information about your fixed assets?
In the simplest form we suggest using a Lever arch or similar folder with three sections:
Items physically present and being depreciated.
Items that are present but are fully depreciated.
Items that were disposed of this financial year
Part of your monthly, quarterly or annual financial checklist should be answering these questions:
- Have any assets been purchased buy the business?
- Have any assets been thrown away, damaged beyond economic repair or sold.
When a new item is purchased, decide on the appropriate depreciation policy for the item (your accountant can advise you on this - there is a lot of choice) and put a summary of the item, the policy chosen, the starting book value and the original invoice(s) into the folder. You will probably also put a record in your accounting system. If your system gives an asset number then make sure it is written on all the appropriate pieces of paper.
When an item is fully depreciated, move it between sections in the folder.
When an item is disposed of (thrown away, damaged or sold) there may be an accounting impact depending on the value obtained for the asset (if any) and the depreciated value. This gives rise to a 'profit or loss on disposal of asset' line in your accounts.
Having a good explanation for these items you have disposed of is essential to a) make sure that your accountant can prepare accurate statutory accounts and b) demonstrate competence & an audit trail in the event of a tax investigation. Where there is a sales invoice for the item make sure a copy is included in the pack. At the end of the financial year, produce your summary of losses and gains and put all your fixed asset disposal records with the rest of your financial records (you will need to keep them safe for 7 years).
If you are attempting to create a paperless office - the above can be accomplished with scans of invoices (purchase & sale) and the use of tags and/or folders to represent the sections of the lever arch file.