Page 312 - Accounting Information Systems

CHAPTE R 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures 283

receiving department delivers the asset into the custody of the user/manager rather than a central store
or warehouse. Second, the fixed asset department, not inventory control, performs the record-keeping
function.

Asset Maintenance
Asset maintenance involves adjusting the fixed asset subsidiary account balances as the assets (excluding
land) depreciate over time or with usage. Common depreciation methods in use are straight line, sum-of-
the-years’ digits, double-declining balance, and units of production. The method of depreciation and the
period used should reflect, as closely as possible, the asset’s actual decline in utility to the firm. Account-
ing conventions and Internal Revenue Service rules sometimes specify the depreciation method to be
used. For example, businesses must depreciate new office buildings using the straight-line method and
use a period of at least 40 years. The depreciation of fixed assets used to manufacture products is charged
to manufacturing overhead and then allocated to WIP. Depreciation charges from assets not used in man-
ufacturing are treated as expenses in the current period.
Depreciation calculations are transactions that the fixed asset system must be designed to anticipate
internally when no external event (source document) triggers the action. An important record used to ini-
tiate this task is the depreciation schedule. A separate depreciation schedule, such as the one illustrated
in Figure 6-12, will be prepared by the system for each fixed asset in the fixed asset subsidiary ledger.
A depreciation schedule shows when and how much depreciation to record. It also shows when to stop
taking depreciation on fully depreciated assets. This information in a management report is also useful for
planning asset retirement and replacement.
Asset maintenance also involves adjusting asset accounts to reflect the cost of physical improvements
that increase the asset’s value or extend its useful life. Such enhancements, which are themselves capital
investments, are processed as new asset acquisitions.
Finally, the fixed asset system must promote accountability by keeping track of the physical location
of each asset. Unlike inventories, which are usually consolidated in secure areas, fixed assets are distrib-
uted throughout the organization and are subject to risk from theft and misappropriation. When one
department transfers custody of an asset to another department, information about the transfer should be
recorded in the fixed asset subsidiary ledger. Each subsidiary record should indicate the current location
of the asset. The ability to locate and verify the physical existence of fixed assets is an important compo-
nent of the audit trail.

Asset Disposal
When an asset has reached the end of its useful life or when management decides to dispose of it, the
asset must be removed from the fixed asset subsidiary ledger. The bottom left portion of Figure 6-11
illustrates the asset disposal process. It begins when the responsible manager issues a request to dispose
of the asset. Like any other transaction, the disposal of an asset requires proper approval. The disposal
options open to the firm are to sell, scrap, donate, or retire the asset in place. A disposal report describing
the final disposition of the asset is sent to the fixed asset accounting department to authorize its removal
from the ledger.

The Physical Fixed Asset System

COMPUTER-BASED FIXED ASSET SYSTEM
Because many of the tasks in the fixed asset system are similar in concept to the purchases system in
Chapter 5, we will dispense with a review of manual procedures. Figure 6-13 illustrates a computer-based
fixed asset system, which demonstrates real-time processing. The top portion of the flowchart presents
the fixed asset acquisition procedures, the center portion presents fixed asset maintenance procedures,
and the bottom portion presents the asset disposal procedures. To simplify the flowchart and focus on the
key features of the system, we have omitted the processing steps for AP and cash disbursements.