Fixed asset accounting records long-term assets (PP&E) from purchase to disposal: capitalising cost, charging depreciation, testing for impairment and booking the gain or loss on sale.
Fixed asset accounting is the part of bookkeeping that records a business’s long-term assets - also called fixed assets, property, plant and equipment (PP&E), non-current assets or long-lived assets - across their whole financial life. It covers capitalising the cost at purchase, charging depreciation as the asset is used, testing for impairment, and working out the gain or loss when the asset is finally sold or scrapped.
In short, it is lifecycle accounting. Every asset runs from invoice to disposal, and at every step the balance sheet has to show what it cost, how much of that cost has been used up, and what is left. This guide covers what qualifies as a fixed asset, what goes into cost, the journal entries with a worked example, the main depreciation methods, measurement models, tax, and how to reconcile the register to the ledger.
What you will learn
- What counts as a fixed asset (and what does not)
- The fixed asset lifecycle
- Capitalisation: what goes into cost
- Depreciation methods
- The typical entries, in debits and credits
- A worked example: one asset from purchase to sale
- Cost model vs revaluation model, and impairment
- Book depreciation vs tax relief
- The records to keep
- Reconciling the register to the ledger (the rollforward)
- Common mistakes
- Fixed asset accounting in practice
- FAQ
- The takeaway
What counts as a fixed asset (and what does not)
Two tests decide whether a purchase is a fixed asset:
- It is held for use, not for resale. A van the business drives is a fixed asset; a van a dealer holds for sale is stock.
- It will be used for more than one accounting period - in practice, more than a year.
A third, practical filter sits on top: the item must cost more than the company’s capitalisation threshold. Below that line, even durable items are expensed straight away.
The usual classes of fixed asset are:
- Land and buildings - offices, warehouses, workshops, and the land beneath them
- Plant and machinery - production equipment, generators, heavy tools
- Vehicles - cars, vans, forklifts
- Fixtures and fittings - furniture, shelving, fitted kitchens
- Computer equipment - laptops, servers, monitors, networking gear
- Leasehold improvements - fit-out work on premises the business rents
These are all tangible assets. Intangible assets such as purchased software licences, patents and trademarks follow similar lifecycle logic but sit under separate rules (IAS 38, or FRS 102 section 18 in the UK) and are amortised rather than depreciated - see tangible vs intangible assets. Many businesses still keep both on one register so they have a single view of what they own.
What fixed assets are not: current assets such as cash, receivables, stock and consumable supplies, which are expected to be turned into cash or used up within twelve months. And one class is a fixed asset but is never depreciated: land, because it does not wear out.
The fixed asset lifecycle
- Acquisition and capitalisation. The purchase is recorded as an asset on the balance sheet, at cost plus whatever it took to get it working - delivery, installation, setup.
- Depreciation. The cost, less any expected residual value, is released into the profit and loss over the asset’s useful life, following a depreciation schedule.
- Use, maintenance and impairment. Routine maintenance is expensed; genuine improvements are capitalised; a sudden fall in value is recognised as an impairment.
- Disposal. The asset’s cost and accumulated depreciation come off the books, proceeds are recorded, and the difference lands as a gain or loss on disposal.
On the financial statements, the lifecycle shows up in three places: the PP&E line on the balance sheet (cost less accumulated depreciation, by class), the depreciation charge and any disposal gains or losses in the profit and loss, and a movement table in the notes showing additions, disposals and depreciation for the year.
Capitalisation: what goes into cost
Asset capitalisation means recording a purchase on the balance sheet instead of expensing it. The capitalised cost includes every directly attributable cost of getting the asset to where it will be used and into working condition:
- The purchase price, after trade discounts
- Import duties and non-recoverable purchase taxes
- Delivery and handling
- Site preparation, installation, assembly and testing
- Professional fees directly tied to the purchase, such as an engineer’s commissioning fee
What does not go into cost: recoverable VAT (it is reclaimed, not spent), staff training on the new equipment, general administration and overheads, and costs of relocating or reorganising after the asset is already in use.
The capitalisation threshold is a company policy, not a rule from any accounting standard. It is a materiality judgement: the business decides that items below, say, a set amount per item are expensed because tracking and depreciating them costs more effort than it is worth. The exact figure is up to the company and its accountant. What matters is that it is written down in a capitalisation policy and applied consistently - otherwise identical laptops end up treated differently from one quarter to the next.
Capital vs revenue expenditure is the same question asked later in the asset’s life. Spending that restores the asset to its original condition - repairs, servicing, replacing worn parts - is revenue expenditure and goes straight to the profit and loss. Spending that improves the asset beyond its original condition - extending its useful life, increasing its capacity, or adding a new function - is capital expenditure and is added to the asset’s cost.
Depreciation methods
Every method needs three inputs: the cost, the residual value (what the business expects to get for the asset at the end), and the useful life. The difference between cost and residual value is the depreciable amount. The methods differ only in how that amount is spread:
- Straight-line - the same charge every year. Simple, predictable, and the default for most small businesses.
- Declining balance - a fixed percentage of the remaining net book value each year, which front-loads the charge. It suits assets that lose value fastest when new, such as vehicles and IT equipment.
- Units of production - the charge follows use (hours run, units made, kilometres driven) rather than time. It fits machinery whose wear depends on workload.
- Sum-of-the-years’ digits - another accelerated method, more common in US practice, that charges a falling fraction of the depreciable amount each year.
Whichever method is chosen should reflect how the asset’s benefits are actually consumed, and should be reviewed if that pattern changes.
The typical entries, in debits and credits
The journal entries for fixed assets follow the lifecycle:
| Event | Debit | Credit |
|---|---|---|
| Purchase | Fixed asset (cost) | Bank or accounts payable |
| Each period | Depreciation expense (P&L) | Accumulated depreciation |
| Impairment | Impairment loss (P&L) | Accumulated depreciation and impairment |
| Disposal | Bank (proceeds), accumulated depreciation, loss on disposal if any | Fixed asset (original cost), gain on disposal if any |
The key point is that the original cost is never edited. Depreciation builds up in a separate contra account, accumulated depreciation, and the asset’s carrying amount - its net book value - is simply cost minus accumulated depreciation and impairment.
A worked example: one asset from purchase to sale
A hypothetical illustration with round numbers: a business buys a machine for 12,000, expects to sell it for 2,000 at the end of a five-year useful life, and uses straight-line depreciation.
Annual depreciation = (12,000 - 2,000) / 5 = 2,000 a year.
Day one - purchase:
| Account | Debit | Credit |
|---|---|---|
| Equipment | 12,000 | |
| Bank | 12,000 |
End of each year, years 1 to 3 - depreciation:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 2,000 | |
| Accumulated depreciation | 2,000 |
After three years, accumulated depreciation is 6,000 and the net book value is 12,000 - 6,000 = 6,000.
Start of year 4 - the machine is sold for 5,000. Proceeds of 5,000 against a net book value of 6,000 give a loss on disposal of 1,000:
| Account | Debit | Credit |
|---|---|---|
| Bank | 5,000 | |
| Accumulated depreciation | 6,000 | |
| Loss on disposal | 1,000 | |
| Equipment | 12,000 |
Both the cost and the accumulated depreciation are now cleared from the balance sheet, and the 1,000 loss goes to the profit and loss. Had the machine sold for 7,000, the same entry would show a gain of 1,000 instead. If an asset is scrapped for nothing, the whole remaining net book value becomes a loss - see asset write-off.
Cost model vs revaluation model, and impairment
Under IAS 16 and FRS 102 section 17, a business chooses one of two measurement models for each class of property, plant and equipment:
- Cost model - the asset is carried at cost less accumulated depreciation and impairment. This is what most small businesses use.
- Revaluation model - the asset is carried at fair value at the revaluation date, less later depreciation and impairment. Increases go to a revaluation surplus in equity rather than to profit. If one asset in a class is revalued, the whole class must be, and valuations must be kept reasonably up to date.
US GAAP does not allow upward revaluation of PP&E, so US businesses stay on the cost model.
Impairment applies under either model. When there is a sign that an asset may be worth less than its carrying amount - physical damage, obsolescence, a sharp fall in use, the closure of the site it serves - the business compares the carrying amount with the recoverable amount and writes down the difference as an impairment loss. Depreciation then continues on the reduced figure. For a fuller treatment, see asset valuation.
Book depreciation vs tax relief
Accounting depreciation and tax deductions usually follow different rules. In the UK, tax relief on equipment comes through capital allowances rather than the depreciation in the accounts; EU countries each have their own national tax depreciation rules; in the US, MACRS and Section 179 set the tax treatment. The rates, thresholds and first-year allowances change regularly, so they are best confirmed with an accountant each year.
The practical result is that many businesses effectively keep two depreciation views of the same asset: book depreciation for the financial statements and a tax computation for the return. Larger entities also recognise deferred tax on the timing difference between the two. For a small business, the essential point is that both views start from the same data - cost, purchase date, asset class and disposal date - so a complete register serves both.
The records to keep
The working document is the fixed asset register: one line per asset, carrying its cost, purchase date and invoice reference, asset class, useful life and depreciation method, residual value, accumulated depreciation, net book value, and where the asset is and who holds it. Behind the register sit the supporting documents - purchase invoices, warranty terms, improvement invoices, disposal receipts - that an auditor or tax inspector will ask for years after the purchase.
The register should cover everything above the capitalisation threshold, from vans down to headsets, and many businesses keep software licences and other intangibles on the same register for one view of what the company owns. If the register currently lives in a spreadsheet, start with a simple asset register covers the minimum columns to get right first.
Reconciling the register to the ledger (the rollforward)
The register is a subledger; the general ledger holds only the totals. Asset reconciliation proves the two agree, and the standard tool is the fixed asset rollforward, also called a continuity or movement schedule. For each asset class:
- Opening cost + additions - disposals = closing cost
- Opening accumulated depreciation + depreciation charge + impairment - depreciation on disposals = closing accumulated depreciation
- Closing cost - closing accumulated depreciation = closing net book value
The closing figures should match the general ledger balances exactly. Any difference points to a missed addition, an unrecorded disposal, or a manual journal that was never reflected in the register. Running the rollforward monthly or quarterly keeps differences small and easy to trace; leaving it to year end turns it into an investigation.
The rollforward only proves the paperwork is consistent. The physical side needs asset verification: checking a sample of assets (or all of them, on a rotating basis) against the register to confirm they exist, are where the register says, and are in the stated condition. This is what catches ghost assets and is exactly what an auditor does during a fixed asset audit.
Common mistakes
- Ghost assets - items still on the register that were lost, broken or thrown out years ago, quietly inflating the balance sheet and the insurance premium.
- Unrecorded disposals - the mirror image: the asset left the building but never left the books.
- No reconciliation to reality. A register that is never checked against physical equipment drifts until the year-end audit becomes archaeology.
- Inconsistent capitalisation - expensing a laptop one quarter and capitalising an identical one the next, usually because no written threshold exists.
- Capitalising repairs, or expensing improvements - blurring the capital vs revenue line distorts both profit and the asset base.
- Depreciating land - or failing to split a property purchase between land and building in the first place.
- Never reviewing useful lives - leaving fully depreciated assets in daily use at nil value, or depreciating assets that were retired long ago.
Fixed asset accounting in practice
The recurring failure is not the maths - it is the gap between the finance ledger and the physical world, because the ledger lives in finance while the assets live everywhere else. The fix is operational: keep the equipment register and the financial detail on the same record, and reconcile on a schedule instead of in a panic before the audit. When that link holds, the audit question “show me this asset” has a thirty-second answer, and every disposal is recorded at the moment the asset leaves rather than discovered months later.
FAQ
What counts as a fixed asset? A fixed asset is something the business buys to use rather than to resell, and expects to use for more than a year. Vehicles, machinery, computers, office furniture and fitted equipment are the usual suspects. Two filters apply: items consumed within the year (stock, supplies) are not fixed assets, and items below the company’s capitalisation threshold are expensed even if they last, because tracking depreciation on trivial purchases is not worth the effort.
What are the journal entries for a fixed asset? At purchase, debit the fixed asset account and credit bank or accounts payable. Each period, debit depreciation expense and credit accumulated depreciation. At disposal, credit the asset account with its original cost, debit accumulated depreciation with everything charged to date, debit bank with any proceeds, and book the balancing figure as a gain (credit) or loss (debit) on disposal.
What is the difference between a fixed asset and a current asset? A current asset is expected to be turned into cash or used up within twelve months - cash, receivables, stock, prepaid expenses. A fixed asset is held for use over several years and is shown under non-current assets on the balance sheet. The accounting follows from that: current assets are expensed as they are used or sold, while fixed assets are capitalised and depreciated over their useful life.
Is land a fixed asset, and is it depreciated? Land is a fixed asset, but it is not depreciated, because it does not wear out and has an indefinite useful life. When a business buys a building with its land, the cost is split between the two: the building element is depreciated, the land element stays at cost (or revalued amount) unless it is impaired.
What is the difference between a fixed asset register and the general ledger? The general ledger holds totals - one line for cost, one for accumulated depreciation across each asset class. The fixed asset register holds the detail behind those totals: each individual asset with its cost, purchase date, useful life, depreciation to date and location or custodian. At year end the register must reconcile to the ledger, and an auditor will pick items from the register and ask to see them in real life.
Do small businesses need fixed asset accounting? Yes, as soon as they own equipment that lasts beyond a year. Tax relief on asset purchases usually flows through depreciation or capital allowances, so the records directly affect the tax bill. Beyond tax, the discipline is what tells a small business what its equipment is worth, when replacements are due, and whether the things on its books still physically exist - questions that get expensive to answer late.
The takeaway
Fixed asset accounting comes down to a handful of disciplines applied consistently: a written capitalisation policy that decides what goes on the balance sheet, a cost that includes everything needed to get the asset working, a depreciation method that matches how the asset is used, and clean entries at purchase, each period and at disposal. Keep the register as the detailed subledger, roll it forward to the general ledger every month or quarter, and verify a sample of assets physically so the numbers describe equipment that actually exists.
Tools that make this easier
AMPthilly keeps the equipment register and its financial detail on the same record. Each asset carries its purchase price and date, supplier, invoice number, warranty dates and expected useful life, with the current owner and location alongside and receipts and invoices attached as documents. Asset valuation and depreciation are part of the Pro plan. A printable QR label on each item opens its profile in any phone browser - no app to install - which makes a physical verification walk a matter of scanning, and setting an asset’s status to retired keeps disposals visible rather than silently deleted. Every change lands in the asset’s audit history, and the register exports to CSV for finance. Start free - 3 users and 25 assets, no credit card required - or talk to us about a larger rollout.
Related terms
- Depreciation - how a fixed asset’s cost reaches the profit and loss
- Depreciation Schedule - the per-asset plan behind the periodic charge
- Straight-Line Depreciation - the even-charge method most small businesses default to
- Declining Balance Depreciation - the front-loaded alternative for fast-fading assets
- Asset Disposal - the closing entry of the fixed asset lifecycle