What is a Fixed Asset & How do you Track Them?

Summary

In this video, Alex, the product manager at Apple, introduces the concept of fixed assets and their importance for organizations. He explains that fixed assets are items owned by the company, with costs spread over multiple years, and discusses the significance of a capitalization policy that defines which purchases qualify as fixed assets based on their value. Additionally, he covers the depreciable life policy, demonstrating how to allocate the cost of an asset, like a computer, over its useful life through straight-line depreciation. This foundational knowledge sets the stage for deeper exploration in future content.

Takeaways

• 😀 Fixed assets are items owned by an organization whose costs are allocated over multiple years.
• 💰 The capitalization policy defines what qualifies as a fixed asset based on a minimum value threshold.
• 🖊️ An item purchased under the threshold, like a $20 pen, is considered an expense rather than a fixed asset.
• 🔧 Organizations often set a threshold, such as $2,000, to determine fixed asset status.
• 📆 The depreciable life policy specifies the time frame over which fixed assets will depreciate.
• 🖥️ A computer costing $2,000 may be depreciated over five years, resulting in annual depreciation expenses.
• ➗ Straight-line depreciation spreads the expense evenly across the asset's useful life.
• 📉 After five years of depreciation, the asset's value on the balance sheet will be zero.
• 🧾 Depreciation helps organizations manage expenses for tax purposes effectively.
• 📺 Future content will provide more detailed insights into capitalization policies and depreciation methods.

Q & A

What is a fixed asset?

A fixed asset is an item that an organization owns, where the cost is spread out over multiple years and is tracked on the balance sheet.

How does an organization determine what qualifies as a fixed asset?

Organizations establish a capitalization policy, which defines a value threshold for purchases. Items above this threshold are classified as fixed assets.

What is an example of a capitalization policy?

If an organization sets a capitalization threshold of $2,000, then any item purchased for more than $2,000 will be considered a fixed asset, while items below this value are treated as expenses.

What is the purpose of a depreciable life policy?

A depreciable life policy specifies the period over which a fixed asset will depreciate, allowing the organization to spread the expense over several years.

How is depreciation calculated for fixed assets?

Depreciation is typically calculated using methods like straight-line depreciation, where the cost of the asset is divided by its useful life to determine the annual expense.

What does straight-line depreciation mean?

Straight-line depreciation means the same amount of depreciation expense is recorded each year over the asset's useful life.

How would you apply straight-line depreciation to a $2,000 computer with a 5-year life?

For a $2,000 computer depreciated over 5 years using straight-line depreciation, the annual expense would be $400 ($2,000 divided by 5) for each of the five years.

What happens to the book value of a fixed asset at the end of its depreciable life?

At the end of its depreciable life, the book value of the fixed asset will be zero if fully depreciated, reflecting that the organization has spread the cost over its useful life.

Why is tracking fixed assets important for organizations?

Tracking fixed assets is important for accurate financial reporting, tax purposes, and understanding the organization's financial health.

Will there be more content on fixed assets in the future?

Yes, the presentation indicates that there will be future videos providing more detailed information about capitalization policies and depreciation methods.