Asset Valuation and Management
All businesses and organisations are required by law to provide an accurate evaluation of their assets in their financial reports. This does not mean, however, that it is necessary for businesses to obtain an actual evaluation from an external valuer on a yearly basis. However it is the job of the auditor to verify the value of assets stated in the end-of-year Financial Reports.
Criminal convictions can result from deliberately falsifying the value of assets.
Generally businesses follow guidelines from the Taxation Office in calculating a theoretical value of assets. In accounting, though, we don't talk about theoretical value but instead the term "book value" is used.
The life-cycle is a very important aspect of calculating the book value of an asset at any point in time. Life-cycle presupposes that at the end of the life-cycle the asset will have little or no value.
If an asset, such as a car, is judged to have a life-cycle of 7 years, then at the end of 7 years the value of the car will be judged to have a book value of NIL, that is the asset is described as "written off". For each and every year of its life-cycle the car will lose 1/7th of its value.
The book value of the car after 1 year is calculated simply be deducting 1/7th of the purchase price of the car. The amount that is left is the book value. If the car was purchased for $35,000, then at the end of the 1st year the "book value" will be $30,000 (1/7th = $5000). At the end of the 2nd year, the car will have lost another 1/7th in value, and will have a book value of $25,000
To ensure that assets are valued correctly, the practise observed by most companies is to maintain an asset database. This database is generally included in typical Financial Accounting Software.
Information that needs to be included in the asset database is as follows:
- Purchase date of the asset
- Purchase price of the asset
- Description of the asset
- Location of the asset
- Supplier of the asset
- Expected life-cyle of the asset
- Total of depreciation accumulated on the asset
- Net book value of the asset.
Microsoft Access comes with a template for an Asset Management Database.
