What is Asset Tracking?
Also called asset management is the process of locating a firm’s physical assets by use of various means that include barcode labels, RFID or GPS to keep constant awareness about their location. The importance of asset management has been equated to managing one’s inventories because the management will always need to know their location, maintenance status, maintenance schedule and other characteristics of the physical assets. The importance of asset tracking permeates the need to be reponsible for locating to account for any missing physical assets, worn out or outdated assets and replacing them (Pontius, 2021).
As defined by (Lisachuk and Dickson, 2021), asset tracking also involves the application of sensors or tags to company assets. The tags can be used for various sizes of assets that range from keys to large company equipment such as machinery and vehicles.
What are some of the Methods of Asset Tracking?
There are several methods of asset tracking that can help save time and money for an organization. The main objective of asset tracking is to maximize the control efficiency of the assets as well as minimize the chances of asset loss. Some of the widely used methods of asset tracking include the use of bar code scanners, computers, and asset management that can offer real-time tracking of assets to reduce downtime and enhance production planning (Pontius, 2021). Proper asset tracking can help effective scheduling of servicing, maintenance, or even preventive maintenance. Bar codes are one of the accurate methods of asset tracking, data collection and assigning each asset a unique identifier for easy recognition and locating.
What are the Benefits of Asset Tracking?
The benefits of asset tracking include:
- Efficiency improvement and cost-cutting
- Minimizing chances of theft and asset misplacement (Lisachuk and Dickson, 2021).
- Adjusting company records for reassigned or transferred assets among departments as well as using the information for taxation purposes.
- Quick and easy way of locating assets in real-time.
- Lowering administrative costs by using automated or digital methods of asset locating.
- Reduce chances of asset loss.
- Generate real-time and accurate reports on each asset and increase the accuracy of asset management.
- Regulatory compliance in certain sectors of the economy.
- Ensures accountability in the event of asset loss or spoilage.
- Improved customer service by minimizing time to locate the assets (Pontius, 2021).
What Counts as an Asset?
As defined by the Corporate Finance Institute, CFI (2021), the term asset refers to any resource that is owned by an organization, individual or even government to accrue economic value from the same. The common types of assets include operating assets, non-operating assets, physical assets, intangible assets, current assets and non-current assets. Assets are mostly listed in the balance sheet and the income statements of companies (Nibusinessinfo, 2021). CFI (2021), cites the international Finance Reporting Standards (IFRS) definition of the asset as any resource that is controlled by an organization as an outcome of previous events and from which economic benefits are anticipated to accrue to the organization in the future.
What are some of the examples of assets?
Examples of assets consist of:
- Accounts receivable
- Cash and cash equivalents
- Patents (intangible asset)
- PPE (property, plant and equipment)
- Investments
- Inventory
- Vehicles and furniture
What are the properties of assets?
Assets have three key characteristics;
- Ownership- this entails the belongingness of assets that can be converted into cash and cash equivalents.
- Economic value- this implies that assets have financial value and can be sold or exchanged.
- Resource- they are property that can be used to create economic value.
How do we Classify Assets?
Assets can be classified using three main criteria:
Convertibility
This categorizes assets based on the ease of converting them into cash. Based on convertibility, assets can be classified as current or non-current assets (fixed assets).
- Current assets are those that can be easily converted into cash or cash equivalents within a short period of one year. They are also called liquid assets and include inventory, cash equivalents, office supplies, marketable securities, accounts receivables, short-term deposits and cash.
- Non-current/fixed assets are those assets that cannot be easily converted into cash or cash equivalents. They are also called hard or long-term assets and they include land and buildings, machinery and equipment, patents and trademarks among others.
Physical existence
This classifies assets based on their physicality whereby they can be tangible or intangible.
- Tangible assets include land and building, machines, inventory and office supplies, marketable securities and cash.
- Intangible assets include goodwill, patents, copyrights, trademarks, brand, licenses and permits, trade secrets and corporate intellectual property (CFI, 2021).
Usage
This categorizes assets based on their purpose or business operation usage.
- Operating assets are those resources that are required for an organizations’ daily operations. Operating assets are used for revenue generation through the company’s operations. They include cash, inventory, equipment, machinery, goodwill, copyrights, building, accounts receivable and cash.
- Non-operating assets are those resources that are not required for the daily running of the business operations but can still be used to generate or support revenue generation. They include short-term investments, vacant land, marketable securities and income from fixed deposits (CFI, 2021).
How are Assets Accounted for?
Accounting for assets begins with the purchase of an asset. When a person purchases a fixed asset such as a building or land, then the fixed asset is debited and the cash or loan account is credited (Sherman, 2020). Fixed-asset accounting is the term used to describe all the financial activities that are related to fixed assets. Fixed-asset accounting records the details of a fixed asset including the purchase, audits, depreciation, valuation, impairment and disposal. A company contains an account for each asset that is owned by the company (Schwarz, 2020). Accounting for assets should be in line with general accounting principles (GAAPS) as well as the international accounting standards board (IASB) and the international financial reporting standards (IFRS) (Scwarz, 2020).
How do we enter Journal Entries for asset accounting?
Acquisition
This enters the total cost of purchase, shipment, installation among others. The journal entry records purchase whether it is done outrightly, through an exchange or instalments.
Depreciation
Depreciation is recorded periodically whereby a decline in book value is noted for tangible assets or amortization for intangible assets.
Revaluation
These journal entries align the asset value to the market value. A series of accounting changes are made to determine if there are any gains or losses in the valuation exercise.
Impairment
This refers to a time when the market value for a fixed asset is lower than the value recorded in a firm’s balance sheet. This is also called writing down an asset.
Disposition
This refers to the disposal of an asset through a sale, scrapping or trading. journal entry in this context is made to eliminate the asset from the company’s records. It may end up being recorded as a gain or loss on the asset disposal account within the accounting period (Schwarz, 2020).
How do we account for asset disposal?
The disposal of assets refers to the elimination of assets from the accounting records. It involves the derecognition or removal of assets from the balance sheets. The disposal of an asset can result in gain or loss that is recorded in the reporting period. The concept of asset disposal involves reversing both the cost of the asset on record as well as its depreciation. The difference in the gain or loss is termed as the net proceeds less the carrying value of the asset.
- When there are no proceeds from the disposal of a fixed asset, whereby the asset is fully depreciated then all the depreciation is debited and the fixed asset is credited.
- When there is a loss after an asset is sold then the cash amount received is debited including all depreciation, asset account but the fixed asset is credited.
- When there is a gain from the sale of an asset, then the cash received is debited, all accumulated depreciation is debited but the fixed asset is credited including the sale of the asset account (Accounting Tools, 2022).
How that Affects Financial Reports
Fixed assets have an impact on all financial statements in various ways. The book asset balances are entered into the balance sheet. Increases in book assets from capital expenditures are recorded as investment outflow in the cash flow statement. Decreases in book assets are caused by depreciation which is entered into the income statement as an expense (Modano, 2022).
The main financial report that is affected by asset accounting is the balance sheet. A balance sheet statement is prepared monthly, yearly, quarterly or as the company deems necessary. It usually communicates the overall financial position of the company. The first section of the balance sheet contains the assets which cash, inventories, prepaid accounts and accounts receivable. They also include the equipment and buildings owned by the company. Assets represent equity for the business hence when the value of the assets increases, the equity also increases and vice versa. The value of a firm’s asset directly impacts its equity in the balance sheet. Liabilities as represented in the second detail of a balance sheet hurt a company’s assets (Kimball, 2021).
How Depreciation Works
Depreciation is an important concept for all businesses as it has a direct effect on fixed assets. It implies writing off the value of an asset over its anticipated useful life as an annual expense against the taxes. However, depreciation does not represent any kind of financial transaction but represents the value for an asset that has been used up over its useful life hence it is deducted as an expense. Tangible assets are prone to losing value over time hence businesses depreciate these assets for taxation (Jon, 2018). Not all tangible assets can be depreciated but only those that have a useful life of more than a year.
How do we calculate Depreciation?
There are many methods for calculating depreciation but the straight-line method is the most common. It involves two steps; deducting the estimated salvage value from the initial cost of the asset and then dividing the value by the pre-determined useful life of the item (Jon, 2018).
When you sell an Asset.
The sale of an asset for disposal is the same as the sale of an asset for ordinary purposes. Except in regular disposal whereby an item is abandoned and written off the accounts, an assets’ sale involves cash that is received by the seller as proceeds from the sale. The sale of an asset has a major impact on both the balance sheet and the income statement. In the balance sheet, it leads to the removal of a capital asset. If the asset is sold for a loss or gain then it must be entered into the income statement which has an impact on the company’s income (Corporate Finance Institute, CFI, 2022).
Why does a company sell its assets?
The sale of an asset can be occasioned for many reasons. These include:
- When an asset is fully depreciated and needs disposal.
- When the asset is no longer needed because it has finished its use.
- When unforeseen circumstances necessitate the removal of an asset from the books of accounts (Corporate Finance Institute, CFI, 2022).
What Journal entries are made for the sale of an asset?
The sale of an asset requires the passing of a journal entry for four main purposes (Lumen, 2022).
- Updating depreciation expenses
- Removing the item and its accumulated depreciation from the balance sheet
- Increasing the cash account or another asset account with the same amount of proceeds received from the asset sale.
- Recording the gain or loss made from the sale (Lumen, 2022).
References
Pontius, N. (2021) What is Asset Tracking?. Camcode Division of Horizons Incorporated. https://www.camcode.com/asset-tags/what-is-asset-tracking/
Lisachuk, H. and Dickson, R. (2021) How Can Asset Tracking Bring Value for You?. Deloitte. https://www2.deloitte.com/nl/nl/pages/energy-resources-industrials/articles/industry40- how-can-asset-tracking-bring-value-for-you.html
Corporate Finance Institute, CFI (2021) What are the Main Types of Assets? Corporate Finance Assets. https://www.corporatefinanceinstitute.com/resources/knowledge/accounting/types-of- assets/
Nibusinessinfo (2021) Business Assets. Business Info.co.uk. https://www.nibusinessinfo.co.uk/content/different-types-of-business-assets
Accounting Tools (2022) How to Record the Disposal of Assets. Accounting Tools. https://www.accountingtools.com/articles/how-do-i-record-the-disposal-of-assets.html
Sherman, F. (2020) Accounting for an Asset Purchase. Chron. https://www.smallbusiness.chron.com/accounting-asset-purchase-51923.html
Schwarz, L. (2020) Fixed Asset Accounting Basics. Oracle Netsuite. https://www.netsuite.com/portal/resource/articles/accounting-software/fixed-assets- accounting-basics. HTML
Kimball, T. (2021) What has an Impact on Balance Sheet? Small Business Chron. https://www.smallbusiness.chron.com/formula-valuing-retailjewelery-business- 34724.html
Modano (2022) Fixed Assets Module. https://www.modano.com/resources/modules_reference_guide/fixed_assets/overview
Jon, (2018) Asset Depreciation Explained. Accounts Portal. https://www.accountsportal.com/blog/assets-depreciation-explained
Lumen Learning (2022) Disposal of Assets. Boundless Accounting. https://www.courses.lumenlearning.com/boundless-accounting/chapter/disposal-of-assets/
Corporate Finance Institute, CFI, (2022). Asset Disposal. CFI. https://www.corporatefinanceinstitute.com/resources/knowledge/accounting/asset- disposal/