Fixed Asset Reconciliation comprises of below two activities
- Verify the physical existence of the assets with that of financial records
- Ensure the Sub Ledger balance agrees with the General Ledger
Are you wondering why these are called Fixed Assets?
The word “Fixed” doesn’t necessarily imply immovable.
Instead, these assets will exist in the business for a longer time.
Benefits keep flowing from those assets for periods exceeding a year.
Let’s understand this from a different perspective. Current assets, such as Inventory, will be either sold or used in production. So, they will last less than a year in business. That’s why we refer them as “Current (occurring or in use).” Thus, Fixed assets are an example of non-current assets.
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Why do we reconcile the Fixed Assets?
An entity business can be Manufacturing, Retail, or a Service Provider. Regardless of the nature of the business, Fixed assets play a significant role in its operations.
The value of these assets is substantial in quantitative terms.
Such vital assets require a check through physical inspections and periodical reconciliation.
What’s the process of Fixed Assets Reconciliation?
We will start by explaining how to perform physical inspections of Fixed assets and exploring the various steps in this inspection.
Technology Innovation
The business employs tracking methods such as optical character recognition, bar codes, or RFID tag assignment to identify and inspect assets.
That’s because the inspection team might need help to track down the asset through manual inspection.
Manual process is labor intensive. It is as good as a treasure hunt.
Why Manual Inspection is cumbersome process (with Classic example)?
Moreover, its not possible to identify an asset at first glance. For instance, Machinery might have different variants installed at various locations. Smartphone models are innumerable nowadays. Manufacturers likely release a new model every day. Because of this, finding the model’s name is a challenge until we use the “about phone” feature.
That’s a prime illustration of the inspection team challenges due to the different capacities, variants, and nature of the fixed assets.
The team should start with the Fixed Asset Register and then perform the inspection manually or using the modern approach mentioned above.
Performing a 100% check is a time-consuming and challenging task.
Effective way of performing Inspection
We can make this task easier through quantitative terms. Reasonable assurance is obtained by considering the monetary value of assets.
In other words, the fixed asset register should be sorted by high- to low-value items. Then, do the math to figure out what monetary value percentage of assets gives the business more assurance.
For instance, it would be wiser to inspect 10 Assets worth 70% of their fixed asset value rather than inspecting 100 assets whose value is less than 20%.
General Ledger and Sub Ledger Reconciliation
The next step in the reconciliation process is to verify that the balances per sub-ledger agree with the general ledger. Ideally, both of these ledgers will represent duplicate business transactions. The primary difference between these two is the varied level of detail in the sub-ledger records.
Considering accounting convenience and ease of maintenance, Sub-Ledger records are maintained differently in an accounting application than General ledger records. So, there’s a need to bridge this gap.
We have a variety of Integration options available to bridge this gap. Thanks to evolving technology.
In the event of automatic accounting, the team needs to reconcile those periodicals if the automatic Integration is not feasible.
Are you wondering what’s the need for Sub Ledger?
Does this sound like a duplicate effort?
It doesn’t.
There are good business reasons to keep a sub-ledger.
Let’s start with an example.
Sub Ledger comprises the operational data.
In other words, a Sales Sub Ledger contains sales invoices, discounts, customer receipts, bad debts, and recoveries. The balance reflected in the Revenue General Ledger is the final piece of the combined activity of the above-mentioned transactions.
Because of maintenance of sub-ledger, this operational data does not need to be at the general ledger level.
Common Challenges in Fixed Asset Reconciliation
- Transactions are recorded in different applications. Integration of all these systems might be a cumbersome and cost-effective process.
- Automatic Integration cannot reconcile the differences between the two ledgers to zero. However, those unreconciled differences might sit well within the material thresholds. It could be significant when taking the yearly variations into account.
- Reconciliation Process is a Labor Intensive and Expensive
Benefits of Fixed Asset Reconciliation
- Accuracy in the financial records and thereby reflects correct financial position to stakeholders
- Lowers the possibility of Misappropriation of assets
- Ensures to calculate the appropriate depreciation expenses, claims insurance expenses on timely basis.
- Supports the Fulfilment of Any Relevant Legal or Statutory Reconciliation Requirements
Conclusion
Fixed Asset Reconciliation is challenging as it involves regular Physical Inspection and reconciling the General and Sub Ledgers. Automatic integration of the various accounting systems and the implementation of robust controls will result in smooth reconciliation.
No one system is perfect.
It’s an ongoing evolution based on lessons from the previous year.
A prior year’s flaw will be answered through next year’s updates on this process.
Considering the significant balance of fixed assets and benefits listed above for reconciliation, it’s worth every penny to perform this exercise on a periodic basis.