Your balance sheet is a snap shot of the value of your company at any particular time. Unlike the profit and loss account your balance sheet contains values accumulated since you began trading. As well as showing the trading assets and liabilities belonging to the company at any one time it shows the profits kept within the company since trading started (accumulated profits) and also assets purchased and retained over the same periods.
But do you really know the detail of what the figures on the balance sheet represent?
As this is a vast subject I’ll begin with fixed assets. There are several categories of fixed assets, in this article I’ll concentrate on the company’s trading assets which could include land, buildings, plant, equipment and office furniture.
Fixed Assets – cost
Some years ago I was involved with auditing a plc which had millions of pounds of assets on its balance sheet, some dating back over 30 years. They were unable to match balance sheet values to their asset register and we had a huge exercise to determine what assets the business possessed and the value for accounts purposes. If it could happen to a large plc, can it happen to you?
Accounting software is not suitable for recording fixed assets detail; this should be supplemented by a separate record usually known as a fixed asset register. Detail should include when and at what cost the entire asset item was purchased and where it is located. Asset register totals should match the totals in the accounts.To help identify, easily movable items should also have a discrete asset number.
Reasons it is important to have a detailed asset record:-
- Safeguard the company’s assets
- Insurance purposes
- Tax requirements – many items will be eligible for tax allowances
- Due diligence – if you decide to sell your business it will be necessary to confirm which assets are owned by the company and how the costs relate to the accounting values
- Audit – if you are a small company you may not require an audit but once you exceed a certain size an audit will be required
- Bank or other finance – a lender may require security over company assets.
Common errors I have encountered in the recording fixed assets:-
- Failure to identify or record disposals
- Not identifying additions or improvements to original assets. For example I have found unidentified bits of machinery which are listed separately but are actually a part of an existing asset
- Disposal value being deducted from asset cost; the original cost should be deducted from total cost so that the asset is no longer included in the accounts
- Failure to identify (capitalise) an asset. Often if an asset is below a minimum value these will be not be capitalised, however sometimes small items purchased individually may be used to build a larger item. For examples lots of screws and individual components may be used to build an item of plant.
The above is a brief outline regarding accounting for fixed assets. Despite, or perhaps because recording physical assets may appear as common sense, it has been my experience that this is often an area where on closer investigation many problems surface.
I would be pleased if you let me know any comments or questions, either on the comment section, or by contacting me here.