Finally I think I can finish this today and be done with this series. We have already discussed some basic ideas about fixed assets, expense, software to track, and how to get the project approved. Next we need to get into the process of actually spending the money for the project and then finish the project and start depreciating.
This is where we need to start using the software. Once the project has been approved you need to keep pushing the project manager to start purchasing. Once he has got the ball moving and called in the purchase then be sure to record all purchases in the system. The system should be able to update the ledger at each period end with the construction in process accounts. Construction is process is basically just capital projects that are not finished yet. These will be larger projects. If a capital purchase is just one small item, then the construction in process will only be one period.
Here is where you get to be the bookkeeper. Each period end you need to be sure to send the purchases that you have recorded to the project manager. The two of you can then reconcile the differences between what the project manager has ordered and what has actually been paid for. Be sure to note the differences to get the reconciliations done for the next month.
Once the project is done spending make sure that everything is finished and billed. Then you can place into service the new assets. This should include the following:
- All spending is complete and the asset works properly. Make a note of this and get the project owner to sign it so that you will have a good paper trail.
- Tag the asset with something durable. A print-and-peel sticker will not work. Get something welded or permanently fixed. This asset tag should include a unique number that will be used to track the asset in the fixed asset system.
- Take a couple of good pictures of the asset and the tag. This is crucial if you want to be able to find this asset again someday.
- Record the information about the asset that includes the name, asset tag, description, total amount of the purchase, purchase date, placed into service date, asset category, asset class, book depreciation type, book life, book notes, tax depreciation type, tax life, tax notes, etc. (Most of this will be included in your software).
- Set up the depreciation to work.
Depreciation can be complicated but mostly you want to be sure that the software is working correctly. Another item to enter would be the salvage value if it will certainly have some value when it’s disposed. Generally I never entered this information because it’s always a nice bonus to get some scrap value, but you may want to check your tax rules to be sure this isn’t required.
Book and tax are different methods of calculating depreciation. For example if the government allows you to depreciate 50% of an asset’s value the first year then you definitely want to take advantage of that to show a lower income this year and pay less taxes. But you know that the asset really didn’t provide that value/detriment this year so you want to be sure and record your book depreciation less than 50% to satisfy the matching principle.
And there we have it. Once you have entered everything in the system, just let it do its job. You need to depreciate once per period and record the depreciation in the ledger. Then you have a great resource to reconcile and be sure everything is level.