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Financing and

Investing Cycle
Fixed Asset System
A firm’s fixed asset system processes transactions pertaining to
acquisition, maintenance and disposal of its fixed assets.
Its objectives are:
Process the acquisition of fixed assets as needed and in
accordance with formal management approval and procedures.
Maintain adequate accounting records and the physical
location in the organization.
Provide management with information to help plan for future
fixed asset investments.
Properly record the retirement and disposal of fixed assets.
Fixed Asset System (cont.)
The fixed asset system processes non-routine
transaction for a wider group of users in the
organization. Managers in virtually all functional areas
of the organization make capital investments in fixed
assets, but these occur less frequent than inventory
Fixed asset accounting system include cost allocation
and matching procedures that are not part of routine
expenditure cycle.
Asset Acquisition
Begins with departmental manager (user)
recognizing the need to obtain a new asset or
replace and existing one. Authorization and
approval procedures over the transaction will
depend on the asset’s value. Department managers
typically have authority to approve purchases
below a certain materiality limit. Capital
expenditures above the limit will require approval
from the higher management levels. This may
involve cost-benefit analysis.
Asset Acquisition (cont.)
The fixed asset acquisition is similar to the
expenditure cycle with only two differences.
The receiving department delivers the asset into
the custody of the department manager rather
than the warehouse.
The fixed asset department, not the inventory
control, performs the record-keeping function
Asset Maintenance
Involves adjusting the fixed asset subsidiary account
balances as the assets depreciate over time or with
usage (except land). The method of depreciation and
the period used should reflect, as closely as possible,
the asset’s actual decline in the utility to the firm.
Depreciation schedule shows when and how much
depreciation to record. It also shows when to stop
taking depreciation in fully depreciated assets. This
information in a management report is also useful for
planning asset retirement and replacement.
Asset Maintenance (cont.)
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 improvements are
themselves capital investments, processed as new acquisitions.
Fixed asset system must promote the accountability by keeping
track of the physical location of each asset. Fixed assets are
distributed throughout the organization, therefore, 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 ledger should indicate
the current location of the asset. The ability to locate and verify
the physical existence of the fixed assets is an important
component of audit trail.
Asset Disposal
When an asset has reached the end of its useful life or
when the management decides to dispose of it, the asset
must be removed from the fixed asset subsidiary ledger.
The asset disposal process begins when the responsible
manager issues a request to dispose of the asset. 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.
Asset Disposal (cont.)
When the clerk deletes the record from the
fixed asset subsidiary ledger, the system
automatically (1) posts an adjusting entry to
the fixed asset control account in the general
ledger, (2) records any gain or loss associated
with the disposal and (3) prepares a journal
voucher. A fixed asset status report containing
details of the deletion is sent to the fixed asset
department for review.
Controlling the Fixed Asset System

Authorization Controls
Supervision Controls
Independent Verification
Authorization Controls
Each transaction should be initiated
by a written request from the user
department. In the case of high-value
items, there should be independent
approval process that evaluates the
merits of the request on a cost-
benefit basis.
Supervision Controls
Management supervision is an
important element in the physical
security of fixed assets. Supervisors
must ensure that fixed assets are being
used in accordance with the
organization’s policies and business
Independent Verification Controls
The internal auditor should review the asset acquisition
and approval procedures to determine the reasonableness
of factors used in the analysis. These include the useful
life of the asset, original financial cost, proposed cost
savings as a result of acquiring the asset, the discount
rate used, and the capital budgeting method used for the
The internal auditor should verify the location, condition
and fair value of the organization’s fixed assets against
the fixed asset records in the subsidiary ledger.
Seatwork #1
A building was acquired worth P 45,000,000. It
is estimated to be useful for 15 years. The
estimated salvage value at the end of its life is
P 3,000,000.

Prepare the depreciation schedule for the

above given information using:
Straight-line Method
Sum-of-the-years Digit Method
Double Declining Method