A Fixed Asset is created when you purchase or acquire through donation equipment, land, building, vehicles, furniture or other assets that have a useful life of more than one year AND cost more than a certain predetermined dollar amount. A Fixed Asset is most often a tangible, physical thing that cannot be easily converted to cash and has a long useful life.
To record the purchase of acquisition of a fixed asset, your accounting person will post the full price/value of the item as an Asset on the Balance Sheet. The item is put on your depreciation schedule and then, periodically (usually month), a portion of the price is expensed as depreciation. This allows the purchase price to be expensed over multiple years rather than recording it as an unusually large expense in a single year.
The particular dollar amount of your capitalization threshold is your decision. We generally recommend a threshold of $1,500; however, in some circumstances, the dollar amount should be much higher and sometimes even lower. There is no need to capitalize (i.e., create a fixed asset) for every office chair or inexpensive desktop computer you buy, even though you plan on using it for more than a year. But that new network server you bought, that will be capitalized — so would the purchase of 10 computers at the same time because, as a group, the purchase price is over your threshold for capitalization.
You might be surprised to learn that your cost for website development can be considered a fixed asset and should be reviewed carefully by your accounting staff prior to audit. Website maintenance is not capitalized, but re-designing your website (if it costs more than your dollar-amount threshold would need to be treated as a fixed asset.
Capital purchases should be tracked on a depreciation schedule (spreadsheet) showing:
- the date of purchase
- item description
- number of years of useful life
- calculation of the annual depreciation amounts from the date it was put in service.
Ideally, your Accounting Policies & Procedures will include something about capital purchases — the threshold amount, any approval requirements and funding arrangements the board and management might determine to be appropriate.
Finally, once a year, at your year-end, you will need to make sure your Fixed Asset list is up to date. If you have added, sold, given-away or thrown-away any of the items, your accountant needs to update the list of what you have on hand at your year-end.