Understanding Capital Asset Accounting for Manufacturers

Understanding Capital Asset Accounting for Manufacturers

Capital assets are the tangible items such as buildings, equipment, and property used by a business to manufacture, supply, or rent items to others. In manufacturing, these can include machines, tools, warehouses, trucks, computers, and more. It is critical that business owners understand why capital asset management is important and have tools to manage their fixed assets effectively.

Why Capital Asset Management is Important: Depreciation, Amortization and Beyond: 

When most business owners think about fixed assets it is often in relationship to depreciation, amortization and tax reduction. However, capital asset management process should reach beyond this issue to:

• Maximize tax depreciation amortization benefits for each asset or class of assets.
• Include an asset disposal system for the sale or scrap of fixed assets that have been fully depreciated, amortized or are no longer useful.
• Track moveable assets to minimize theft or other loss.
• Manage lost, stolen, or damaged assets so they are not retained on the books and insurance claims can be filed.
• Track movable assets reassigned to another division within the company to maintain an accurate fiscal picture that allows for informed decision making.

Capital Asset Management Procedures: 

There are four types of procedures needed to best manage capital assets within a manufacturing environment.

Asset Recognition 

Begin by determining the base unit of the asset. This is important in manufacturing as some pieces of equipment have components with different useful lives. Decide if the asset is the entire machine or if the machine should be viewed as several assets for accounting purposes. Next, compile the total cost of the base unit, match it to a capitalization limit and assign it an asset class. 

Capital Asset Record

This includes a description, tag or serial number, location, acquisition date, cost, deprecation/amortization class, and useful life. It should also assign responsibilities and record keeping requirements. 

Depreciation/Amortization

In addition the asset class and depreciation factors, these procedures should also address salvage values, depreciation and amortization calculations generating monthly or quarterly reports.

Interdepartmental Transfer

These procedures record the transfer of the asset and the documentation of the receipt of the asset by the next department.

Properly accounting for capital assets is critical to the success of any manufacturing company and understanding the potential accounting benefits will further that success. Have and use capital asset management procedures to maximize their benefit to your business.

If you would like to learn more about best practices when it comes to capital asset accounting for your manufacturing business, contact the knowledgeable accountants at Hogg, Shain & Scheck.