Fixed Assets

Fixed assets are those assets owned by a company that contributes to the company's income but are not consumed in the income generating process and are not held for cash conversion purposes. Fixed assets are tangible items usually requiring significant cash outlay and lasting for an extended period of time.

When an asset is purchased, the value of the asset is not recorded against the company's revenue, but is entered by opening a separate account for the account. This accounting process is known as capitalizing.

For accounting purposes, a portion of the value of the fixed asset is charged against profit during each accounting period. This process is called depreciation.

Unlike its more parochial meaning, depreciation is not simply a reduction in value. It is a fundamental aspect of accounting as dictated by the Matching principle that ensures that expense is matched against the revenue it helps to generate.

Many methods of depreciation calculation exist today, however major corporations usually use one of the following methods:

While it is not possible to list all fixed assets here, the following are a few that will show up on the typical balance sheet: Because of the cash outlay involved, the purchase of most fixed assets is usually preceded by an extended period of cost/benefit analysis by the company's accounting staff. The aim of this analysis is to determine, as best as possible that the asset purchased will add value to the company during its useful life, by generating greater positive cash flow than it cost when it was purchased. '

Fixed assets are usually booked at the acquisition cost. However, in some cases additional costs may be incurred to make the asset useable. This cost should also be included in the cost of the fixed asset. Consider the purchase of a refrigerator by a grocery store. The refrigerator cost $10,000, however it needed a special thermostat to allow it to operate in the store. Because the thermostat cost the company a $1,000, the value of the refrigerator will be recorded as $11,000 ($10,000 + $1,000).

As the asset is used in the business it may have to be repaired from time to time. The cost of the repair can either be capitalized or expensed, depending on whether the repair resulted in an extension of the asset's life or not. Repairs extending the life of the asset will add to the value of the asset (that is, capitalized), while repairs that merely serve to maintain the life of the asset will be expensed.

Generally speaking, the following initial cost of an asset will be capitalized to represent the value of the asset:

Understanding fixed assets is very important to a clear understanding of accounting and should be an area exploited by anyone anxious to learn about the accounting process.

Liabilities

Companies will borrow from financial institutions, from suppliers or from the any individual, group of individuals or corporation willing to lend. Debt is therefore an ever-present part of a company's financial consideration.

At any point in time, the average company will find itself in the following position: It will own assets; it's owners will maintain some value in the company; it will be indebted to creditors/non-owners. Liabilities reflect the level of indebtedness to creditors.

Liability is a source of funds for a company, and the company will use the fund (purchasing power) to enhance the business (purchase fixed assets, inventory, pay creditors etc.)

Liabilities are contractual obligations and companies are required to honor their liability contracts or face legal suits. The content of a liability contract may be extremely simple or very complex. Some creditors may request that the borrowing company pay interest on its debt, as well as maintain certain accounting ratios, a specific cash balance or a certain level of net worth, while another credit may simple require repayment of the principal at a particular time.

Current Liabilities

Current liabilities may be viewed as the flip side of current assets, and requires similar managerial attention as current assets. Current liabilities represent the amount owed to creditors due for payment within 12 months.

Current liabilities are usually amount owed for operating expenses, dominated by accounts payable. However in many cases, current liabilities also include Current Portion of Long Term Debt, which is the amount of long-term debt due for payment in less than 12 months. Managing current liabilities is very important to a company's cash flow process and extended viability. Failure to appropriately manage current liabilities will result in working capital issues, which could lead to operating failures.

Current liabilities are ideally settled using current assets, necessitating the combined management of the two. Current assets less current liabilities is called working capital.

The following are a few of the current liabilities you may see on the typical balance sheet:

Accounts payable represents trade debts and is usually due within 30 days. Many companies are able to negotiate trade debt terms longer than 30 days, improving their cash position for as long as payment is delayed.

Notes payable represents intermediate debt borrowed for a period greater than 2 but less than 10 years. The amount included among current liabilities is the amount due in less than twelve months. The amount due after 12 months is reflected on the balance sheet as long-term debt.

A significant amount of a company's long-term debt is repaid over many years. Amount will fall due on a yearly basis and that portion is shown on the balance sheet as current liabilities in the form of "Current Portion of Long-term Debt". Failure to pay this amount when due may result in a loan default, which could have serious negative repercussion for the company.

Income tax payable is the amount of tax owed to the government based on the accounting profit earned.

Wages payable represents amounts owed to employees.

Accrued expenses represent operating expenses incurred but not paid for. Accrued expenses may be analyzed as the flip side of prepaid expenses. While prepaid expenses represent amount for services/goods not yet received, accrued expenditure represents services used/goods received but not yet paid for.