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Hi, thanks for joining us again for another episode of asks. Burl CPA, uh, today we’re talking about is accounting for fixed assets. I have a main with me here now may, so you have some experience in doing the fixed assets and some of the world’s source clients and going through that property plant and equipment listing each and every month. Edmonton Bookkeeping is extremely important in small businesses. So, um, the, the quote that we have for you today is a Warren Buffet all time. Great investor counting is a language of business, um, in, in terms of fixed assets. You know, like the 0.0, 50% of all Canadian businesses out of business in five years and put only 11% of those business seek professional help. Just 11%. I imagine how many more we keep on the tracks if they got some help. So the story is we review the interim financial statements of businesses and these were sports.
They’re suppose to give them the information that they need to make decisions. How are the transactions concerning their most major equipment and the vehicles, the leasehold improvements, real estate, they’re booked incorrectly. And in turn, the income statements, profit and loss statements that they’re using, they’re completely unusable. You know, these transactions for major assets, property, plant and equipment, the big number of transactions, they’re booked incorrectly, that income state and is, is it’s flat unusable. So May, what are the questions you think these business owners should be asking? What is a simple definition? Yeah, so normally the simple definition of an asset that I would use is this is, uh, something that has a useful economic benefit of more than one year. So anything that you would have a perk that you purchase that has a benefit of more than one year. Now we’re talking about an asset as opposed to an expense.
So example, you know, I, I, we buy some paper paper’s going to be used up in a couple of months. You know, we buy some advertising what was out every month. Um, but if we buy a vehicle, we’re not expecting to use up that vehicle the year. Uh, we, you know, we do some leasehold improvements when we fix up a, a space that we’re going to operate out of, you know, those walls. And the plumbing and the law, the wires behind the wall there, uh, that’s going to have a useful economic life. It useful benefit of more than one year. So that would be the simple definition that would be encouraging people to, to think about on their purchases. You know, is it something that’s an expense I useful economic life of less than one year or is it an asset and you useful economic life and useful benefit of more than one year.
What are some of the common types of fixed assets? Yeah, so those types would be, you know, starting from, let’s say vehicles are extremely awkward. A lot of, especially contractors are going to have vehicles on their balance sheet. Then you’re going to have leasehold improvements. So they, the space that you lease, this space that you operate your business out of, you know, those improvements to the space, putting up the walls, putting in the floor, putting the ceiling and plumbing, the electrical, the shelving, um, those, that is a, a fixed asset. Uh, so that would be included in that, what we call the property plant and equipment. Also major equipment. Maybe we have a, a major CNC miss machine. With all of these situations, Edmonton Bookkeeping can help you. Um, even the computers, I mean, the computers, those would be, uh, something that has a useful benefit of longer than one year to the business. So it’s, it’s those things also the real estate.
So if you build a building and you own the land, um, those are the substantial items that these are a fixed assets, we call them, you know, they have a useful benefit of the longer than a year. Do you normally not worry about assets with a cost of less than $1,000? Yeah, we always go to be considerable, you know, how much time we’re putting into these records and if that time is being spent on items that are what we call a material, or even beyond the material that we call them insignificant. Edmonton Bookkeeping can help you with your documents. Um, and so normally with, uh, with most files, we would look at, uh, uh, uh, material, um, kind of material limit of 1000 bucks. So even if this item has a useful economic life of more than a year, let’s say you buy a printer, you buy that printer from best buy and that printers 400 bucks.
Yeah, you’re going to use it for longer than a year, but it’s not worth tracking it as a fixed asset. Just put it as an office expense here. You know the goal isn’t to be 100% correct. The goal is to be materially correct and have an efficient accounting processes that you can account. You can accomplish the accounting work for inefficient fee because ultimately we want to make money in business, so I normally draw the line a thousand a thousand I’m not going to worry about the, the, the economic life, the lifespan of the acid. It’s just, it’s an expense more than a thousand. I’m going to ask myself, does this have a, an economic benefit of longer than one year? If so, we’re probably going to classify it as an asset. When you purchase assets, should this experiential, you show on your income statement, so no, it doesn’t belong on your income statements.
Let’s have that contractor. He goes out and purchases the truck and the truck is $40,000, you know it as revenue for the month is 80,000 and he’s got a payroll of of uh, 40 Grad and he has rent of 5,000 bucks. It doesn’t have another $40,000 zero auto expense in that month. That’s not how it works. Um, so really that asset is going to go straight onto the balance sheet, is going to bypass the income statements. So it’s going to come out of cash and it’s going to go in as a fixed asset and it’s not going to show on the income statement or right away and it shouldn’t because you know the, that acid is going to be used to do the work, you know, for years at this point, not one single month. So it shouldn’t, you know, completely obliterate one month and make that a net income on that one month. Look completely out to lunch.
When did these assets affect the net income? So
they affect the income statement when they’re depreciated. So slowly over time we’re going to depreciate that truck. And you know, if you’re a dentist, you go out and buy an x ray machine is not going to be expensed on, you know, the month that you buy, but it’s going to be depreciated over time. Um, so usually those amortization entries and most small businesses, we’re going to book them annually. Uh, some bigger businesses are going to start booking the monthly. I have a question if that’s necessary yet. S at a smaller scale, I think you gotta have, have some real critical mass before that exercise, uh, is useful, a useful, useful time, I guess being invested in doing that exercise. So I would think each and every year you’re going to book your Amortization, we’re going to depreciate that equipment at your end. Um, and every single year we’re going to depreciate that equipment and the value of that equipment is going to go down and down and down and slowly we’re going to add that onto [inaudible] or amortization expense to the income statement in that year.
How does this satisfy the revenue and expense matching principle?
Yeah. So the, the, the matching principle is we should have the expenses, um, matched to the income that they generate. So when we’re looking at, you know, one particular time period, the income in that time period, we should have the expenses dealing with that income in the same time period. So whether we have to, you know, a crew for an expense that’s going to get built in a later period just so we can move it back here or we have an asset and there’s a big huge expense right here in this month. We don’t want it, you know, overshadowing that income in that period. We want it spread out over time. So it’s matched to the revenue that that asset is, is, uh, helping the business earn. Okay.
Is it a good idea to set up a sub accounts for a significant fixed asset?
Yeah. You, you’ll get a lot of businesses where these fixed assets and they are the business, you know. Um, let’s see. You’re a rental company especially like, and you have, you know, a hundred different pieces of equipment, um, that you’re renting out. And snowmobile is qual as heaters or whatever it is. We want to know on an APP, on an item by item basis, you know, what those assets costs us historically if we just bury them all in, in vehicles and you know, we have, uh, you know, 10 vehicles over the last decade and then we tried to go back later and figure out what that one cost us. You know, when it comes time to uh, to sell it, um, you know, we don’t have as as much information. So I would suggest that the, you know, creating these sub accounts for really significant assets are important.
And it’s not the state that you can’t have one computer account for all the computer equipment in your business. Um, I think it, it, it has to do mainly with the assets that will probably be sold on an individual transaction. That’s probably the tests that you want to look at. So when you buy this thing, you had to think to yourself, is this just going to be a piece of computer equipment that’s going to be obsolete and we’re going to just toss it at someday or donate it or sell it for, for next to nothing? Don’t hessitate about your Edmonton Bookkeeping, call today. Um, or is this something that, you know, it’s coming in for a significant price and we’re buying it at 40 grand and somebody we’re going to sell it for a significant value in maybe 10,000 bucks later on down the road. We want to know, we want to be able to capture that history can make it easy for insurance.
It can make it easy for, um, for banks if they’re issuing you financing. It can be an easy when you’re selling the business because you’ve got a good list of all the significant assets as well. So I would encourage people to use those sub accounts for assets that have a real significant value asset account. What is the light? Yeah, so if you have a small change, remember our recommendation is we got to ask yourself a, does this have an aide? Was this more than a thousand bucks and be, was it, does this have a useful life of longer than a year? So let’s say you have a $50 increase in your computer equipment. Well maybe someone went to best buy and bought printer ink. Um, so, or they went to best buy and bought that one little printer that doesn’t really need to be added to the, the, the asset base.
Um, so again, usually when you have that small addition and it goes up by less than a thousand dollars in that asset account, usually it means it was something that should have been expense was added to the asset account. And that’s kind of, it was creating extra work because that’s something that’s going to be added to the, the capital asset continuity schedule at the end of the year and kind of factor into the depreciations get the calculations, quite frankly, just not worth it if it’s not big enough. What does the book, so the book value is different than the market value. The book value is the cost of the asset less what we depreciated since we bought it. So you know, we had a car and most cars, we can appreciate it 30% so the first year is half year rule. You can do 15% and then we’d appreciate 30% so let’s say we have a car we’ve depreciated, I don’t set, we’d appreciate a $10,000 car would depreciated 3000 bucks.
So that depreciation expense is what showed up on the income statement so far. Now the book value is seven thousands of the 10,000 original costs, 3000 depreciation over time, and then seven thousands what’s not yet been depreciated. That is the book value and it can be different. It can be dramatically different than the fair market value and assets. So, um, so it’s important to know is is the book value of an asset or is it the fair market value of the asset? A lot of the Times the book value can be good, um, prediction of what the fair market value means. But we have to understand that fair market value can also be different. Doesn’t book value or fair market value show on your financial statement? Most small businesses are going to have book value on their financial statements. You know, trying to, you know, quantify the fair market value of these assets on small business financial statements.
In order to do that reliably, you’re, you’re using expert appraisers and eh, it’s kind of ridiculous. There’s a lot of, uh, um, you know, we were talking about big publicly traded companies who are using I frs or international financial reporting standards. Sometimes there they have to report the fair market value, but small businesses, I mean, they’re using the book value of assets. That’s what’s there. Uh, that’s the simplest way to do it. And I can’t think of a reason why a small businesses would, would want to go through the trouble of calculating the fair market value of the assets, which really is, it’s kind of subjective anyways because you don’t really know how much it’s worth and you try to sell it. Uh, so what’s the point of, of calculating it when you intend to keep the acid and, and use it to in your business. Edmonton Bookkeeping is important to your business and you should take action on it. So, um, so I think that’s what we have for today. Thanks so much for tuning in. Again, you know, as always at the Lichen subscribe button so we can continue to bring you tips on how to beat the odds at business. And as always, if you have any questions, please leave them in the comments below and we’ll address your peers in a future video. Thanks very much.
