Basic information about fixed assets

This is a specific type of item. The basic characteristic is that it serves to perform activities/tasks, its life cycle is of a longer period (usually several years) during which it is gradually consumed (amortized/depreciated). For standard items, the cost is calculated when the item is sold (COGS, cost of goods sold), for materials it is when it’s consumed (Material cost), while for these items the cost is calculated for the appropriate period.

When keeping an inventory stock, a standard item has its quantity, stock price, and stock amount (product quantity multiplied by stock price). This item also has a basis for depreciation and the amount of total depreciation. The difference between the base and total depreciation is the stock amount.

The basis of depreciation is its purchase value. Since the life cycle of such an item is long, during that period, the base may have “corrections” (eg repairs, installation of new parts, adjustment to market value, etc.). So, in practice, the depreciation base can differ from its purchase value.

What is the most important parameter for fixed assets?

The most important parameter for fixed assets is the annual depreciation rate. It is a percentage amount that indicates how much value is “lost” in a year. It is calculated based on the useful lifespan of each asset separately (eg if the lifespan of the car is 5 years then the annual depreciation rate will be 20%).

Before any operation with these items, this information must be entered. For each asset, its annual depreciation rate (or life cycle) must be known. This information depends on the accounting standards of each company. Usually, these items are divided by depreciation categories with corresponding rates. You should bear in mind that the depreciation percentage depends on the type of activity of the business itself (for example, a car has a rate of 25% for an IT company, while it is 35% for a rent-a-car company).

There are also two exceptions to the percentage entry. One is that the fixed asset does not have a depreciation rate. This is the case with land, investment properties, or when it is not yet in operation. Another exception is when the items are fully depreciated upon purchasing. This most often happens with items of low value or small inventory (eg some tools).

The depreciation percentage is always applied to the depreciation base of the item in question (if it were applied to the stock amount, mathematically, it would never be fully depreciated).

A fixed asset is considered fully amortized when the cumulative amount of depreciation is equal to its base, i.e. stock amount is 0. Such items may remain in operation but they will not have further depreciation costs.

Note: In ERPAG, we apply the time method of calculating depreciation.There are other methods of calculating depreciation (e.g. the functional method), but they are practically not used in the category of businesses for which ERPAG is intended.


Process coverage

Applications marketed to SMBs typically do not have options for fixed assets or only have depreciation calculations.

Our goal is that all business processes of SMBs are recorded in ERPAG. We have decided to include almost complete fixed asset management in ERPAG, namely:

  • Beginning inventory
  • Purchasing
  • Depreciations
  • Merging
  • Transfer between warehouses
  • Creating from inventory
  • Increasing the value
  • Contracting
  • Splitting
  • Convert to inventory
  • Selling
  • Revaluation and other value correction

Item setup

First, it is necessary to create the fixed asset as an item in the products and service list. And that is a special item type.

create fixed asset

The data you have to enter is very similar to other Items, the difference is in a separate panel for entering the amortization/depreciation parameters.

depreciation parameters

The first parameter is a depreciation period. It can be:

  • No depreciation (you don’t calculate the depreciation, ever)
  • Monthly (used for fixed assets of high value)
  • Quarterly
  • Semi-annual
  • Yearly (most commonly used, as it must be done at the end of the year)
  • Manually (there is no particular period when it is calculated, the operator determines the period himself)

This parameter indicates when depreciation should be done on the fixed asset. For example, if depreciation is set to “monthly”, ERPAG will inform the operator with a notification on the menu that amortization needs to be done.

Note: Depreciation calculation requires operator interaction. ERPAG will not perform the depreciation automatically. We designed it this way for practical reasons. Usually depreciation is done by an accountant or a person with sufficient knowledge, because fixed assets management is a complex process. In ERPAG version 3.0, we had automatic depreciation calculation, but it turned out to be impractical. It happened that there were changes on the fixed assets that were not entered into the application, because the operator was on vacation. Depreciation was done automatically, the fixed asset was sold, while the change made by the contractor remained unrecorded.


Initial state / Beginning inventory

Suppose you acquired most of your assets before the implementation of ERPAG in the company, or you need to start tracking fixed assets now. In that case, the option by which you will enter items that are already in use is “Beginning inventory” – “Fixed assets” type.

beginning inventory
fixed assets type
base and depreciation value in beginning inventory

Upon creating the beginning inventory, aside from selecting the description, you also have to enter:

  • Quantity – usually 1 pcs, although it is possible to enter more pieces (e.g. for furniture)
  • Stock price – what will be the stock price (calculated when base and depreciation are entered)
  • Stock amount – stock value (calculated when base and depreciation are entered)
  • Base – depreciation base (to which the depreciation rate is applied)
  • Depreciation – Total calculated depreciation until the start of monitoring in ERPAG.

Note: If you have several warehouses, the beginning inventory is done separately for each warehouse, that is, where the fixed assets belong. Due to the simplicity of monitoring, most people choose that to be a main warehouse or a separate one, open for fixed assets.

After posting the document, the items entered in the beginning inventory will appear on the fixed assets report.

fixed assets report
fixed assets report

As we mentioned, unlike the standard item, there are two additional columns. These columns are also inserted into the Stock Card of a product.

In internal accounting, instead of an inventory account as in the case of products, the value is divided into two accounts.

general ledger fixed assets

Note: All postings in internal accounting for fixed assets are on those two accounts.


Depreciations

Depreciation is done through the option in the ERPAG Inventory module:

depreciation in inventory module

Since, in our example, we set the monthly depreciation, and the beginning inventory was done with the date January 1st, a notification appeared on the menu.

notification

When entering the document list, an option for the automatic creation of a document, divided by dates, appears on the right side.

Note: Only the first date will appear on the notification. For example, if depreciation has not been done for 4 months, the notification will only appear for the first month. This way, we avoid a large number of unnecessary notifications.

depreciation days and expenses

ERPAG will indicate how many days have been calculated and the amount of depreciation costs.

Depreciation is calculated based on the total number of days in the period.

The calculation formula is:

[base] * [anual rate %] * [days]/[days in year] = 70,000.00 * (25/100) * (31 / 366) = 1,482.24

The result of completing the document is a reduced stock amount.

stock amount of fixed asset

There is also a “days” column on the stock card, which indicates on how many days the depreciation is calculated.

days column in stock card

The journal voucher in internal accounting has postings to the expense account and the accumulated depreciation account.

journal voucher

Acquiring a fixed asset

When acquiring a Fixed asset type item, it behaves like any other item. You simply enter it in the Purchase Order and receive it. You just first have to create the fixed asset with the appropriate parameters in the product and service list.

When entering a purchase order, it is possible to combine different types of items. i.e. there is no need to separate the procurement of fixed assets from other items.

purchase order with combined items type

Since this is a direct purchase of a fixed asset, there is no accumulated depreciation, the stock amount is identical to the depreciation base.

stock amount equal to the base

In the generated journal entry in internal accounting, the value of the fixed asset from the purchase order will be on the fixed asset account.

journal voucher

Full depreciation

Sometimes there is a need to fully depreciate the fixed asset. Such an asset will still be in use but will have no value (stock amount = 0). One of the applications is small equipment (tools or machines of low value), such items are depreciated immediately after being purchased. In such a case, there is currently no direct automation (due to the split role of procurement and fixed assets management), so it is necessary to create a “full depreciation” depreciation document.

In our example, we will select the fixed asset we previously purchased.

full depreciation

The complete stock value will be written off, but the quantity will remain, because it is still in use for us.

no stock value
stock card

And in internal accounting, the cost will be fully depreciated.

general ledger

Selling a fixed asset

Just as a fixed asset can be purchased, it can also be sold after some time. The sale is done like any other sale, i.e. via sales order. It is possible to combine it with other items, but in practice, this is a rare case.

selling fixed asset

What is specific about the sale of fixed assets is that depreciation must be done on the date of the requested transaction. Which practically means that the stock amount must be corrected for the depreciated value. For example, if your depreciation period is annual, and the sale is made halfway through the year, depreciation must be calculated for the days for which the fixed asset was in operation, i.e. for half a year.

ERPAG will display a logical error message and will not allow the transaction to be posted.

transaction error

Note: The sale of a fixed asset is more than an exception than normal transactions. The need to perform manual depreciation is also a type of additional procedure to prevent inadvertent operator errors.

The manual depreciation is done as a “Manual entry” depreciation.

depreciation manual entry

After posting the depreciation document, you can continue the transaction.

The quantity and value of a fixed asset will be 0 on the fixed asset stock list and stock card.

fixed asset stock amount
fixed asset stock card

In internal accounting, the values on the fixed asset accounts will be reduced. The difference between the selling price and the stock amount of the fixed asset will be posted to the income (positive value) or expense (negative value) account.

In our example, we sold at a price of 75,000.00, while the stock amount at the time of sale was 57,596.99. The difference of 17,403.01 will be credited to the “other revenue” account.


Create fixed assets from inventory

In practice, sometimes there is a need to create a new fixed asset from the existing items in stock.

The most common reasons are:

  • The supplier separately delivers / invoices the fixed asset components;
  • At the time of the item receipt, the operators do not have enough information to record the fixed asset;
  • The fixed asset was listed as a standard inventory item by mistake;
  • Putting the fixed asset into use subsequently;
  • Using your inventory to create a fixed asset.

We’ll show you an example where we will purchase computer system components from a vendor and create a new fixed asset.

Procurement is done normally, via Purchase Order.

new purchase order

To create a new fixed asset we will use Work order – fixed assets type.

work oder fixed asset

After selecting, you will get a pop-up window to choose which work order type you need. We will select “Merging a Fixed Asset”.

select work order type

Note: This option will appear in the work order only if there is at least one fixed asset created in the products and service list.

If you have not created the asset previously, you can create it directly from the Work Order via the “Add new” option during the search.

create new product from work order

Determing Depreciation parameters

Determination of Depreciation parameters

The rest of the steps are almost identical to the standard work order. It is necessary to load components first and then perform Merging a fixed asset.

load components in work order

The newly created fixed asset will take over the stock amount from its components.

fixed asset stock card

In internal accounting, the value from the Inventory account will be “transferred” to the fixed assets account.

general ledger fixed assets

Merging two or more fixed assets into one

In a “Merging a fixed asset” work order type, it is possible that the component can also be a fixed asset.

Note: If you use other fixed assets as components, you must have up-to-date depreciation of those assets.

The result of such a work order is that the base and depreciation values of the components (which are the fixed asset type) will be transferred to the new fixed asset.

fixed asset stock card
fixed asset stock card
fixed asset stock card

The new Fixed asset will be formed with “transferred” values.

new fixed asset stock card

Increasing the value of fixed assets

In the life cycle of these items, there is, sometimes, also a need to increase their value. The increase can be by replacing or installing new components and/or hiring third-party companies (contractors) for finishing, service, or maintenance.

In a fixed assets work order type, we select the “Increase value of a Fixed Asset” option.

increase value of a fixed asset

The procedure is almost identical to when creating a new fixed asset, but the quantity remains unchanged, i.e. only the value increases.

increasing value via work order

In our example, we will have a Contractor fee of 150.00 and 4 pcs of winter tires at 300.00, which will increase the base by 1,350.00.

stock card fixed asset

Note: We note again that prior to this transaction, the fixed asset must be depreciated as of the date of the transaction.


Splitting fixed assets

This option is the reverse of merging. It is most often used when we want to “convert” a fixed asset into a standard item. What is specific to this option is that the exact stock amount must be determined for each component. There is also an “auto stock amount” option, but in most cases it has to be entered manually.

splitting a fixed asset

The stock value of a fixed asset must be identical to the sum of components. If this is not the case, ERPAG will display a logical error message.

logical error message

You can then manually correct the amount to get the correct total.

manually correcting amounts

In our example, there is a difference because the fixed asset had depreciation (1 day) in the meantime, so its stock amount was reduced.

Note: If there is an output item that’s a fixed asset type, the base and accumulated depreciation from the fixed asset that’s being split will be distributed to it accordingly.


Write-off

When your item is no longer functional (eg broken), we use the Write-off option in Depreciations to remove it from the inventory.

write off fixed asset
write off fixed asset

Unlike full depreciation, this reduces both quantity and value to 0.

stock card fixed asset

Warehouse transfer

Each item belongs to a warehouse. In internal accounting, the accounts have their own analysis by warehouses, so depreciation costs are recorded separately by warehouses. The transfer is done in the same way as the Inventory transfer, except that depreciation must be done on the day of leaving the warehouse.

transfer fixed asset

If you have landing costs, they will be added to the depreciation base in the destination warehouse. The base and accumulated depreciation will be transferred to the new warehouse.

fixed asset stock card

Revaluation and other value correction of fixed assets

The correction of the current values of these items is done through the stock adjustment option.

stock adjustment fixed assets
stock adjustment stock price

With this, you can correct the depreciation base and accumulated depreciation.

stock adjustment fixed assets

The fixed asset will have the entered values from the moment of posting this document.

fixed asset stock card

With items that have a long lifespan (eg real estate), due to changes in the market, sometimes there is a need to adjust their value to the market value. This process is called revaluation. This accounting option is usually applied by large companies, while it is a rare case for SMBs.

stock adjustment fixed assets

By default, the journal voucher has postings to the Surplus (income) or Shortage (expenditure) account.

general ledger surplus

Posting a revaluation is a complex procedure, it depends on several factors. Depending on internal or national accounting standards, it can be accounted in several ways (revaluation reserve, impairment loss, revaluation surplus, etc.). It would be better to consult with an accountant. In any case, in ERPAG, there is a possibility of posting corrections via a manual journal voucher.

manual journal voucher

Custom documents

So far, we have explained fixed assets management options that are directly related to inventory and internal accounting. But in practice, there is also a need to record and monitor other changes that are not directly related to the stock itself. For example, some businesses need to keep track of service intervals while others need to record insurance policies. Since everyone has their own special needs, it can be solved in ERPAG through custom documents.

In short, the custom document is an option that allows the user to independently create their own type of document.

custom documents

Note: We recommend that this option is created by someone with admin privileges.

We will show you an example where we will create a custom document to monitor the condition of the company car. First, we need to define the fields in the document header of the custom document.

custom document defining fields

In particular, we will create a “fixed asset” type field. This means that we will be able to “insert” the fixed asset into the custom document. We recommend the status to be “Required field”, to prevent document entry without selection of the item.

Apart from the header, the custom document has the possibility to have more tables. In table 1, we will also define the columns.

custom document define table 1

The defined custom document will appear in the “Automatization / Customization” menu.

automatization  module
custom document

Example of entered data

custom document data insert

Integration with other Accounting software solutions

Currently, ERPAG integrates with QuickBooks Online and XERO accounting software. Some of the editions of these software solutions have some kind of fixed asset tracking. As far as we know, they only support depreciation calculation. However, ERPAG has covered more complex processes, so full integration via API service is not possible.

In any case, ERPAG will send the purchase and sale of the fixed asset as a standard item. Fixed assets work order type will also be transferred according to the same principle.

You can find more about integrations on these blogs:

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