Hello to you and thank you for joining us this week to your business financial process. Welcome to another read on The Keys. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!!
The major differences in fixed assets and inventory are how you use them, for how long and how to manage and account for them. Most businesses have inventory regardless if they sell products or services. Inventory is not always an item to be resold. The key is to understand how to identify and manage these items.
Both inventory and fixed assets have values listed on a balance sheet under assets that are grouped separately because of the useful life and accounting treatment. Fixed assets are a large purchase of items used in the production of the business, have a useful life of longer than a year and hold a significant value. Inventory includes items such as property or contents of a building. It also includes raw materials and finished goods used in production and held by a company until sold.
Let’s consider an apartment complex. The fixed assets would be the apartment refrigerators and air conditioner units. These items have a significant value and last longer than a year. On the other hand, to maintain the apartments, the office manager will keep a surplus of AC filters on hand for routine service. The would be considered inventory because the useful life is less than a year and cost is not weighted as the unit itself.
As mentioned above, the values for inventory and fixed assets are listed in separate areas of the balance sheet. Inventory is listed in Current Assets and Fixed Assets are listed among long-term assets. Inventory is held on the balance sheet at purchase value but may not be removed from the books in the same manner. There are many methods of reducing inventory including the most common FIFO, or First In First Out. Fixed assets are held on the balance sheet as a “long-term” asset and their value is depreciated in a contra-account for the life of the asset and the costs are expensed monthly.
Understanding the correct classification of purchased items in your business will help you maximize your tax savings and make better spending decisions. The way your business uses these items will determine your ability to deducts the full costs of the purchase or only a portion based on usage. Your bookkeeping service provider will be best equipped to manage both processes for you.