The fixed asset recognition procedure is used in accounting to recognize and categorize fixed assets at an early stage. It is important to recognize fixed assets in early period of accounting as with the passage of time and procedures it become a very complex transaction. The steps involve in fixed asset recognition are:-
Determining the base unit of the asset
This step involves determining the base unit for the asset. The base unit determination involve a number of other factors such as the number of useful years of life of the entire asset and its various parts, the level at which the asset is tracked physically and dividing a single asset into a number of basic units
Compiling the cost
In this step the total cost associated with the base units of the assets are compiled. Compilation activities include construction of the base unit, purchased costs and administrative and technical costs
Comparing cost with capitalization cost of the business
After compiling the cost of the base unit it is compared with the total capitalization cost and it is determined that whether the cost of base unit exceeds the total cost of capitalization of the business.
Assigning a class to the asset
The assets are assigned to a particular class to which they are suited best for example furniture, building, land, vehicles and equipments.
Creating a Journal Entry for the Asset
At the end a journal entry is made where the asset account is debited and the expenditure account is credited according to the cost of the base unit that is determined earlier.
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