As your business grows, you will likely invest in significant, long-term items to help it operate, such as computers, vehicles, or machinery. These are known as fixed assets. Unlike day-to-day expenses that are recorded immediately, the cost of a fixed asset is recorded on the Balance Sheet and then gradually expensed over its useful life through a process called depreciation.
Properly managing fixed assets is a cornerstone of accrual accounting. It ensures your financial statements are accurate and provides a true picture of your company's value and profitability. Dappr's fixed asset management system automates the complex calculations and journal entries required for depreciation, making this advanced process straightforward.
Note: This is an advanced feature available to businesses using the accrual accounting method.
What are fixed assets and depreciation?
A fixed asset is a tangible, long-term resource that a company owns and uses in its operations to generate income. The key characteristics are that it has a useful life of more than one year and it is not intended for sale to customers. A laptop for an employee is a fixed asset; the electricity to power it is a regular expense. When you purchase a fixed asset, you "capitalize" it, meaning you record it as an asset on your Balance Sheet rather than expensing the full cost on your Income Statement right away.
Depreciation is the accounting method of systematically allocating the cost of a tangible asset over its useful life. It represents how much of the asset's value has been "used up" in a given period. Think of it like a car: the moment you drive it off the lot, it begins to lose value. Depreciation is the process of recording that gradual loss of value as a business expense. Recording depreciation is crucial for two reasons:
It accurately matches the asset's cost to the revenues it helps generate over time. This is a core principle of accrual accounting called the matching principle.
It provides a more accurate valuation of your assets on the Balance Sheet by reducing the asset's value over time. The remaining value is known as its book value.
Managing fixed assets in Dappr Accounting
To get started, navigate to the Fixed Assets section of Dappr Accounting.
From the main menu, go to Accounting, select the Bookkeeping tab.
Click on Fixed assets in the secondary menu. Here you will see a list of all the fixed assets your company has registered.
Adding a fixed asset
You should register an item as a fixed asset when you purchase a significant, long-term resource for your business.
From the Fixed assets page, click the Add fixed asset button in the top-right corner.
A full-screen editor will open. Fill in the asset's details. It is highly recommended that you upload a receipt or invoice for documentation, as this is critical for audits and tax purposes.
Depreciation settings
This section contains several technical but important fields that determine how the asset's value will be expensed over time.
Depreciation Method: This is the formula used to calculate depreciation. Straight-line is the most common and simplest method, where the asset is expensed evenly over its useful life. For example, a $6,000 computer with a 5-year useful life would depreciate by $1,200 each year, or $100 per month.
Placed in Service Date: The date you actually started using the asset for your business, which may be different from the purchase date. Depreciation begins from this date.
Useful Life: An estimate of how many years the asset will be productive for your business. The IRS provides guidelines for the useful life of various asset types, and using these standards is common practice.
Purchase Price: The full cost of the asset, including any taxes, shipping, and installation fees. This is the starting value for depreciation.
Salvage Value (Optional): The estimated resale value of the asset at the end of its useful life. If a $5,000 machine is expected to be worth $500 at the end of its life, you would only depreciate the difference ($4,500). If you expect it to be worthless, the salvage value is $0.
Select or create an Asset category. This links the asset to the correct accounts in your Chart of Accounts (e.g., "Computers," "Vehicles"). You can set default depreciation settings for each category to speed up the process for future assets.
Click Register asset. A pop-up will ask you to select the bank or credit card account used to pay for the asset.
Confirm by clicking Register asset again.
Dappr will now automatically create the necessary journal entry to record the purchase (debiting the relevant Fixed Asset account and crediting your bank account) and will build a depreciation schedule, which will be displayed on the dedicated page that you're redirected to. Each month, Dappr will post the depreciation expense automatically, keeping your books accurate without any manual work.
Selling or disposing of a fixed asset
When you no longer use an asset, you must record its disposal to remove it from your books and recognize any gain or loss from the transaction.
Navigate to the asset's dedicated page by clicking on it from the Fixed assets list.
Click the Sell or dispose button.
In the pop-up, provide the details of the disposal:
Disposal Date: The date the asset was sold or retired.
Sale Proceeds: The amount of cash you received from the sale. If you scrapped the asset for no cash, this would be $0.
Disposal Costs: Any costs incurred to sell or scrap the asset (e.g., shipping fees, service fees).
Click Record disposal.
Dappr will automatically stop the depreciation schedule and create the final, complex journal entry. This entry will remove the asset's original cost and its accumulated depreciation from your Balance Sheet, record the cash received, and recognize any profit (a gain) or loss on the disposal in your Income Statement. For example, if an asset has a book value of $1,000 and you sell it for $1,200, Dappr will record a $200 gain. If you sell it for $700, it will record a $300 loss.