Every company must take actions to safeguard, control, and manage the assets it owns.

 Every
employee is responsible to follow policies and procedures to safeguard the company's assets.
Cash Assets needs to be managed effectively to safeguard and utilize them efficiently. In this
section, we will start with understanding what are assets, what are various classification of assets
and then we will focus on Asset Management.

Asset management refers to the system of monitoring and maintaining assets effectively and
efficiently. It applies to both tangible assets and intangible assets. Asset management is a
systematic process of operating, maintaining, and upgrading assets cost-effectively. In this
section you will learn about assets, asset management, asset classification, investment
management and enterprise asset management. Enterprise asset management refers to the
business processes that support management of an organization's assets. We will cover physical
asset management as well as fixed assets management.

We will also learn about “IT Asset Management” and asset life cycle management and strategic
decision making in the IT environment. This section will conclude with a brief discussion about
digital asset management. These lessons will also provide you with the knowledge and skills you
require to apply internal control principles and to effectively manage assets.

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What are Assets
What are Assets:

According to the Financial Accounting Standards Board, assets are “probable future economic
benefits obtained or controlled by a particular entity as a result of past transactions or events.”

According to “The Institute of Management Accountants” assets is “any owned physical object
(tangible) or right (intangible) having economic value to its owners; an item or source of wealth
with continuing benefits for future periods, expressed, for accounting purposes, in terms of its
cost, or other value, such as current replacement cost. Future periods refer to the following year
or years.”

An asset is anything that will probably bring future economic benefit.

Classification of Assets:

Assets are classified into two categories: tangible and intangible.

Tangible Assets:

Tangible assets are assets that one can touch, hold, or feel. Typically called fixed assets in
accounting literature, tangible assets are the physical things that a business uses in the production
of goods and services. They constitute the production facilities, buildings, equipment, and
vehicles.

These operational assets of a business include furniture, computers, and similar items not used up
within a year.

Intangible Assets:

These are primarily financing items: stocks, bonds, mortgages, etc.

Current Assets:

Assets that are converted into cash during the normal production cycle are current. Current
physical assets are referred to as financial assets. These are physical assets such as raw materials,
work-in-progress inventories, finished goods, and goods held for resale.

Financial Assets V/s Fixed Assets:

Physical items can be financial assets, held in inventory, in one business, whereas in other
businesses or applications they may be fixed assets. An example of such a financial asset would

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be real estate held in inventory by a real estate investment and sales organization or builder,
which would be a fixed asset for everyone else. Equipment manufacturers have financial assets
in finished goods or inventory held for sale, as well as plant and equipment that will be sold to
other businesses. The inventory is a financial asset; when sold for use in a production line it
becomes a fixed asset to the purchaser.

Historical Cost & Matching Principle:

The matching principle of accounting calls for the matching of costs with the accounting period
those costs benefit. The purpose of the historical cost record is to ensure that the costs incurred in
the purchase of assets in a past accounting period will be spread over the future accounting
periods that benefit.

The costs recorded for each asset acquired include the purchase price and anything necessary to
make it ready for production. All expenditures involved in the acquisition of an asset and getting
it ready for use are capitalized as part of original cost. Included are the invoice price for the asset,
transportation charges, and installation costs, including any construction or changes to the
building necessary to house it. Other incidental costs are sales or use tax, duties on imported
items, and testing and initial setup costs. The total costs of acquiring and putting the asset into
actual production use should be capitalized.

Concept of Depreciation:

The cost of an asset must be spread on a rational, systematic basis over the periods of its useful
life.

Fixed Assets Management:

While the concept of an asset is fundamental to business accounting, for many organizations
fixed assets management is still one of the weakest areas of internal controls. This may result in
overpayment of taxes and insurance, higher total costs of ownership, missed opportunities for
income tax deductions, and the risk of non-compliance with regulatory mandates.

In the subsequent articles we will discuss asset management and asset management process
flows both from a functional as well as systems perspective.

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 Fixed Assets Process Flow
Meaning of Fixed Assets

 An asset is a basic unit of economic value that is expected to provide benefit beyond a
single period. The value of the asset is recorded on the company balance sheet.
 Examples of assets are cash, accounts receivable, inventory, prepaid insurance, land,
buildings, equipment, trademarks, and certain deferred charges.
 There are two major asset classes; tangible assets; and intangible assets.
 Tangible assets are classified as either; current assets, or fixed assets.
 Current assets include, inventory and receivables, while fixed assets include, buildings,
property, equipment, land, machinery, and equipment.
 This tutorial will focus on the class of tangible assets, called fixed assets.

Sub Processes under Fixed Assets Functional area

The process for fixed assets can be summarized in following steps:

 Procuring an asset
 Registering/Adding an asset
 Depreciating/Appreciating Assets
 Transferring Assets
 Adjusting Assets
 Disposing Assets

Process Flow for Fixed Assets Process

Fixed Assets process can be divided into six sub processes;

 Procuring an asset
 Registering/Adding an asset
 Adjusting Assets
 Transferring Assets
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 Depreciating/Appreciating Assets
 Disposing Assets

These steps are cyclic in nature and most of them happen in any fixed management lifecycle
except for the ones shown in green. The green ones are optional steps, which may happen in
certain business scenarios.

Now we will understand each of these steps in detail.

1. Procuring an asset

An asset is most often entered into the accounting system; when the invoice for the asset is
entered; into the accounts payable; or purchasing module of the system.

Assets can also be directly entered in the, Fixed Asset Management System

2. Registering or Adding an asset

Most of the information needed to set up the asset for depreciation is available at the time the
invoice is entered

Information entered at this stage include; acquisition date, placed-in-service date, description,
asset type, cost basis, depreciable basis etc.

Some information will flow automatically based on the asset type selected based on the
relationships that need to be defined in the system.

3. Adjusting the Assets

Adjustments to existing asset information is often need to be made.

Events may occur that can change the depreciable basis of an asset

There may be improvements or repairs made to asset that either adds value to the asset or extend
its economic life

4. Transferring the Assets

Sometimes a fixed asset is transferred to another subsidiary, reporting entity, or department

within the company.

These inter-company and intra-company transfers may result in changes that impact the asset’s
depreciable basis, depreciation, or other asset data.

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This needs to be reflected accurately in the fixed assets management system

5. Depreciating the Assets

The decline in an asset’s economic and physical value is called depreciation.

According to GAAP, depreciation is an expense, that must be periodically reflected, on a

company’s books, and allocated to the accounting periods, to match income and expenses.

Sometimes, the revaluation of an asset, may also result in appreciation of its value

6. Disposing the Assets

When a fixed asset is, no longer in use, becomes obsolete, is beyond repair, the asset is typically
disposed

When an asset is taken out of service, depreciation cannot be charged on it.

There are multiple types of disposals, such as abandonments, sales, and trade-ins

Any difference between the book value, and realized value, is reported as a gain or loss.

Key Transaction Fields

Let us understand some key generic fields that are used in almost every system or ERP during
the Fixed Assets process;

Asset Category; Selection of Asset Category, enables inheriting the accounting properties of the
underlying category.

Asset Description; Description of the asset or enter any notes

Purchase Date; The date of purchase of the asset

Accounting Date; Date used to determine which period this posting belongs to within the
general ledger

Starting Date; Determine which starting date the amortization is calculated for

Asset Value; Initial value of an asset

Usable Life; Years or Months to depreciate the asset over

Residual Asset Value; Value of the asset at the end of the depreciation period

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Depreciate; Usually a checkbox to define if the asset needs to be depreciated

Depreciation Type; The different methods to calculate depreciation

Depreciation Start Date; Date from which to calculate the depreciation postings

Depreciation Amount; The amount of the initial value to depreciate

Depreciated Value; Field indicating how much of the depreciation value has already been
posted to the general ledger

Depreciated Plan; A field indicating how much value of the asset will be depreciated until the
end of asset life

Previously Depreciated Amount; The amount that has already been amortized before the asset
was entered into the system

Amortize; Usually a checkbox to define if amortization is calculated

Asset Amortization; Tracking depreciation installments

Total Amortization; Field with the total amortization amount posted for a selected period

Accounting; Specific accounting settings are for an asset

Key Setups / Perquisites

Some key master elements or setups that are perquisite; to this process before transactions can
take place in any ERP or any other system:

Asset Category; Selection of Asset Category, enables inheriting the accounting properties of the
underlying category.

Asset Amortization; Tracking depreciation installments

Accounting; Specific accounting settings are for an asset

Depreciated Plan; A field indicating how much value of the asset will be depreciated until the
end of asset life

Key Roles that are required to manage this process are

Procure-to-Pay; For asset procurement

Finance; This role manages assets in all aspects

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Company Admin; Used for configuration of certain elements

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