What are operating assets
Operating assets represent the essential tools and resources a business requires to deliver its products or services. These range from everyday office necessities like stationery and computers to significant items like manufacturing machinery.
What are fixed assets?
Amongst operating assets, items intended for prolonged ownership or use are categorised as fixed assets. Such assets include tangible property like buildings, heavy equipment, office furnishings, and company vehicles.
In the Australian context, assets are typically classified as ‘fixed’ if they are anticipated to be of service beyond three years and possess a monetary value exceeding a certain threshold.
Accounting for Fixed Assets
In Australia, accounting for fixed assets involves recording the purchase as capital expenses, classifying them under asset accounts in the balance sheet, and then depreciating their value over the asset’s useful life according to the ATO’s depreciation rules.
Methods of Depreciation
There are two chief approaches to depreciation: diminishing value (or balance) depreciation and straight-line (or linear) depreciation. While sole traders are required to use the diminishing value method in their business statements, all businesses must employ the same method when accounting for tax purposes in their annual returns.
Diminishing value depreciation is computed according to prescribed ‘depreciation rates’ as determined by tax authorities, typically based on the asset’s class and effective life.