Capitalized fixed assets are assets that meet or exceed a defined value threshold and are depreciated in value over their useful life.
Asset depreciation is usually recorded each month. One common depreciation method is to calculate annual depreciation expense and then divide this figure by 12 to determine the monthly expense.
Accountants will post a debit to depreciation expense and a credit to accumulated depreciation. Accumulated depreciation is a contra account that nets against the corresponding asset account in the company’s balance sheet.
Reconciliation is a procedure whereby companies review all transactions within financial accounts such as depreciation. The typical method an accountant will use to review related fixed asset information is through an account summary from the general ledger and through verification to the physical asset by conducting a physical inventory.
Problems will occur if the company improperly recorded the asset’s cost or used an incorrect depreciation method for reducing asset’s values. Consequently, periodic audits are typically conducted of fixed asset and deprecation accounts.
Auditors will review fixed assets and relating depreciation to ensure the organization used proper accounting procedures to calculate depreciation. Because depreciation expense reduces a company’s net income each accounting period, misuse or mistakes with depreciation calculations can lead to invalid tax savings. Companies may face fines and penalties as a result.
Using an inappropriate depreciation method for several years can result in financial restatements, creating a difficult situation for a company when having to repay previous years’ taxes.