Need for Fixed Asset Register
A fixed asset register (FAR) is accounting book with a list of fixed assets belonging to particular entity. Traditionally the fixed asset register was maintained in written form by the accountant using a book that was set aside specifically for tracking fixed assets. Now with the advent of IT systems for bookkeeping it is more often held in electronic format. Learn the importance of maintaining a FAR.
A fixed asset register is an item listing of all fixed assets owned by the business. It should include details such as:
- Description of the asset
- Location of the asset with business unit
- Purchase price and date
- The useful life of the asset
- Date put to use
- Expected value at the end of its useful life
- Depreciation expense (accumulated and current)
- Asset Block & asset category if applicable
- Gross book value and net book value
FAR & General Ledger
The main purpose of a fixed asset register is to keep track of the book value of the assets and determine depreciation to be calculated and recorded for management and taxation purposes. Keeping an up to date and accurate fixed asset register not only assists with ensuring compliance but also helps in short- and long-term capital investment planning.
In addition, it is important to keep a fixed asset register as it allows businesses to keep track of the book value of assets and their depreciation over time. General Ledger only has the total account balances and depreciation balance for a particular asset category and transactions in summary. It does not have all the details of the individual assets that comprise the total asset category and also no details of depreciation on each of these individual assets. Having so many details in the GL would clutter it too much. So it is best to have the Asset Line level details in a separate place. In large organizations, FAR is maintained by systems or asset management software solutions. The FAR serves as a FA sub-ledger for all accounting purposes.
Assets not under the direct control
It also records fixed assets that are not under the direct control of the company e.g. leased assets, assets under construction, and imported assets.
Compliance with Laws
The tax and accounting laws require the maintenance of this register. By tracking each movement in each fixed line item, the FAR ensures control better and prevents misappropriation. It allows for the computation of depreciation and for tax and insurance purposes.
Management Reporting
With the help of a FAR, reports like the location of assets, the value of individual assets in an asset category, depreciation on each asset in the category, the value of assets under construction or leased assets, etc. can be generated which enable the management in making capital budgeting decisions. FAR also assists in estimating the future capital investment in fixed assets and to determine business valuations in case of mergers or acquisitions.
Fixed Asset Reconciliation
At the end of each month/quarter (depending on company policy), relevant GL and FAR reports are pulled out to perform FA reconciliation. The total for each asset category in the GL should tie with the sum total of the individual assets in that category as provided by the FAR. In case, the two don't match, the reasons are analyzed and necessary action is taken to balance the two.
Besides, the total of depreciation as per the depreciation schedule should tie-up with the depreciation balance in the GL, which is calculated on the basis of the block of assets and not an individual asset. If there is a mismatch between the depreciation amounts, reconciliation is required to identify and resolve variances.
This is important to ensure that the GL balance of FA reported in the Balance sheet is correct and accurate.
Identification of Assets
A secondary purpose is to allow for the easy identification of an asset by assigning each asset a unique ID that may be printed on labels in the form of a barcode. FAR also helps in estimating the repairs and maintenance costs. In certain countries, subsidies are allowed on certain assets. The value of assets is determined by fixed asset registers.
Physical Verification of Assets
Besides the GL and sub-ledger reconciliation, there is a physical verification of FA. Assets are physically verified for quantity and location as per the FAR details. This is generally an annual process.
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