The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition

Fixed asset arithmetic

Begin by looking at how a beanie would want you to account for fixed assets in, say, a monthly financial projection. Suppose that in October you acquire a squeezing machine for $120,000 cash; it has an expected life of five years (60 months), no residual value, and so you write it off in 60 equal instalments. The accounting entries are as follows:

1. In October you debit fixed assets – machinery $120,000 and credit cash at bank by the same amount.

2. Every month commencing in November you debit $2,000 ($120,000 divided by 60 months) to the expenditure account depreciation of machinery and credit the asset account fixed assets – depreciation of machinery with the same amount.

Beanies, and by osmosis senior executives, tend to ...