OUTLINE

1. Title:
Subtitles:

Fixed Asset Procedures

Conceptual Fixed Asset System
Physical Fixed Asset System
2. Define fixed asset
Fixed asset - property, plant, and equipment used in the operation of a business
Relatively permanent items that often collectively represent the largest financial investment by the
organization
3. Define fixed asset system
Fixed Asset System processes transactions pertaining to the acquisition, maintenance, and
disposal of fixed assets
Objectives:
Processes the acquisition of fixed assets as needed and in accordance with
management approval and procedures.
Maintain adequate accounting records of asset acquisition, cost, description, and
location
Maintain depreciation records for depreciable assets in accordance with acceptable
method
Provide management with information to help it plan future fixed asset investments
Properly record the retirement and disposal of fixed assets
4. Difference of this topic from Chapter 5
Chapter 5
Fixed Asset Procedures
Routine acquisitions of raw materials and finished goods Nonroutine transactions for a wider group of users in
inventories
the organization
Automated
Transactions require specific management approval and
explicit authorization procedures
Treated as expense of the current period
Capitalized which yield benefits for multiple periods
Longer life acquisition cost is apportioned over its
lifetime
5. DFD of Fixed Asset System
Asset Acquisition
The Dept. manager recognizes the need to obtain a new asset/replace an existing one.
Authorization and approval procedures over the transaction.
Departmental managers typically have authority to approve purchases below a certain materiality limit. Capital
expenditures above the limit require approval from the higher management levels.
The request is approved and the supplier is already selected.
The Prepare Purchase Function prepares the purchase order and sends a copy of it to the
Accounts Payable Function. The Accounts Payable Function then creates a memo entry of the
pending receipt of the fixed asset ordered.
The purchase order is mailed to the vendor/supplier.
The Accounts Payable Function receives the suppliers invoice from the vendor.

Suppliers invoice contains the financial information that is to be recorded in the Accounts Payable Function
The Receiving Function receives the fixed asset from the vendor.
The Receiving Function delivers the fixed asset to the custody of the user/manager.
The Receiving clerk prepares a receiving report and sends it to the Fixed Asset Department which
is responsible in updating the records of the assets (fixed).
The Receiving clerk also sends another receiving report to the Accounts Payable Function which
will reconcile the memo entry already made for the pending receipt and the receiving report in
order to recognize a liability.
The Accounts Payable Function sends the Asset Cost Data to the Fixed Asset Department for
record keeping.
The Accounts Payable Function will authorize the Cash Disbursement department for the
payment of the fixed asset ordered.
The Accounts Payable Function sends a journal voucher to the department responsible for the
General Ledger Processes.
The Fixed Asset department sends a journal voucher to the department responsible for the
General Ledger Processes.
The Cash Disbursements clerk prepares the check to be mailed to the vendor the records the
information contained in the check in the check register.
The Cash Disbursements department then informs the Accounts Payable Function that a check
was already mailed to the vendor in order for the Accounts Payable department to update the
records (remove the liability).
The Cash Disbursements department sends a journal voucher to the department responsible for
the General Ledger Processes.
The General Ledger Processes department reconciles the journal vouchers received then records
it to the General Ledger. The expenditure cycle is completed here.
Asset Maintenance
Depreciation schedule is an important record used to initiate the depreciation calculations that the
fixed asset system has designed. show figure
-shows when and how much depreciation to record, also shows when to stop taking depreciation
on fully depreciated assets, this report is also useful for planning asset retirement and replacement
Asset maintenance also involves adjusting accounts to reflect the cost of physical improvements
that increase the assets value or extend its useful life. Such enhancements, which are themselves
capital investments, are processed as new asset acquisitions.
The fixed asset system promotes accountability by keeping track of the physical location of each asset. It is an
important component of the audit trail. Fixed assets are distributed throughout the organization and are subject to
risk from theft and misappropriation.

Asset Disposal
It begins when the responsible manager issues a request to dispose of the asset.
After the disposal request has been approved, a disposal report describing the final disposition of
the asset is sent to the fixed asset accounting department to authorize its removal from the fixed
asset subsidiary ledger.
Disposal options open to the firm: sell, retire, donate or scrap
6. Physical Fixed Asset System-Computer-based fixed asset system
Asset acquisition procedures
Asset maintenance procedures
Asset disposal procedures
The AP and Disbursement processing steps are omitted from the flowchart.
Asset acquisition procedures:
Fixed asset accounting clerk receives a receiving report and a cash disbursement voucher
From the computer terminal, a clerk creates a hard copy of the fixed asset report
From the computer terminal, a clerk creates a record of the asset in the fixed asset
subsidiary ledger
The FAS automatically updates the fixed asset control account in the gen. ledger and
prepares journal vouchers for the gen. ledger dept. as evidence of the entry
The system also produces reports for acctg. Mgt.
Fixed asset record structure: cost, accumulated depreciation, residual value
The system prepares a depreciation schedule for each asset when its acquisition is originally recorded. The schedule is
stored on computer disk to permit future depreciation calculations.
Asset maintenance procedures:
Department managers must report any changes in the custody or status to the fixed asset department.
From a computer terminal a clerk records such changes in the fixed asset subsidiary ledger.
Finally, a fixed asset depreciation report, is sent to the fixed asset department for review.
Asset disposal procedures:
The disposal report formally authorizes the fixed asset department to remove from the ledger an
asset disposed of by the user department. When the clerk deletes the record from the fixed asset
subsidiary ledger, the system automatically updates
A fixed asset status report containing details of the deletion is sent to the fixed asset department
for review.
FAS Controls
Because of the similarities between the fixed asset system and the expenditure cycle, many of the
controls are the same and have already been discussed. Our discussion of fixed asset controls will
thus focus on three areas of principal difference between these systems:
1. Authorization - should be formal and explicit because of high cost of FAS:
a. acquisitions
b. changes in depreciation methods

2. Supervision - threat of misappropriation requires constant management oversight:

a. theft - secure physical locations of assets
b. misuse - monitor on-the-job activities
3. Independent Verification - internal auditors should periodically verify FAS records:
the reasonableness of factors used in decisions (useful life, discounts, budgeting
model)
location, condition, and fair value of the fixed asset records in the subsidiary ledger
the programming logic for automatic calculations (depreciation)