Accounting Basics: How to Book a Fixed Assets Journal Entry

From startup to enterprise, there are many benchmarks within a growing business. The first product mockup. The first funding round or employee. The first 100, 1,000 or 10,000 customers. The hard-earned IPO.

And, for a fast-growing startup like FloQast — it will be the infamous and inevitable move from first office, with spotty WiFi and uncontrollable internal temperature, to a headquarters that actually fits all our employees and then some. In addition to the new office space, the upgrade from DIY furniture a college student would own to something a bit more durable and sophisticated.  

Back to the Basics: How to Book a Fixed Assets Journal Entry

This blog is going back to the basics in accounting, and the objective of this post is to walk you through the correct way to book a fixed assets journal entry. For our new office space in Los Angeles being completed this October, we decided on a 200 year old restored barn wood boardroom table from Michigan, which is also our token fixed asset example.  

The Rules (AKA GAAP)

According to GAAP, this table will only be good for seven years. This is because the table is considered a fixed asset, and GAAP classifies all fixed assets into predetermined categories or “buckets” in order to estimate its “useful life.” The table, in this example, falls under the “Furniture and Fixtures” category, which is set at seven years.

That 200-year-old wood will probably take us past seven years, but at the same time, the chairs around the table may only last two. If you look around at all the furniture and fixtures in your office, altogether they will likely last an average of something like seven years.

To get this table, our general contractor Ed contracted another table designer to build it. Say the price of the table itself comes out to $3,200. However, Ed charges us a contractor fee of 15%, which adds another $480. Shipping the table costs another $100, so that means the final bill comes out to $3,780.

How to Categorize Supporting Costs: Capitalized or Expensed?

Now, the table is clearly a fixed asset. We paid a price for it, and according to GAAP it will continue to provide us with value for around seven years (hopefully a lot more).

What about the contractor fee? It’s not a fixed asset. It looks more like an expense, because it was just a fee that doesn’t add any value, not something of value that we can go back out and sell. The shipping cost is similar. Do we capitalize the cost of the table and expense the rest?

Turns out, we capitalize everything – the table, the contractor fee and the shipping cost.

How Do We Book this Journal Entry?

Starting from when Ed sends us the invoice, this is how we will book the journal entry at each stage in the process:

Invoice: When we receive the invoice, we debit Fixed Assets, since we have added value to our Fixed Assets. We also credit Accounts Payable, since we owe money but we haven’t paid it yet.

Payment: A few weeks later, when we pay, we then take that amount out of Accounts Payable and add value to Cash to even everything out.

Depreciation: Here’s where it starts getting nerdy. Since we are recognizing value over time from the table until it “expires” (after 7 years), we have to account for that value over time. According to GAAP, we do this monthly. Each month, we’ll take value out of expense and add it to a new account, Accumulated Depreciation.

If you spread out the cost over 7 years ($3,780 divided by 84 months) = $45 per month.

When accumulated depreciation amount reaches $3,780, the full value of your table has been realized.

What if We Sell the Asset?

Say you get tired of the table after two years, and decide to get rid of it before it’s seven-year life is over. However, maybe a few wealthy homeowners decided that barn wood is the latest and greatest for home décor, and with 200-year Michigan barns in pretty high demand, the fair market value has shot up.

You sell your boardroom table for $20,000.