Understanding Fixed Assets in a Company

In a company’s balance sheet, all assets are divided into two main types: current assets and fixed assets.
The difference isn’t about what the asset looks like, but how and why the company owns it.

1. Current Assets (Short-Term Assets)
Current assets are the things a company expects to use up, sell, or turn into cash within a year.
They help the company run its daily operations.
Examples:

Cash: Money in hand or in the bank that the company can spend right away.
Accounts Receivable: Money that customers owe to the company.
Inventory: Goods that the company plans to sell soon.
Prepaid Expenses: Payments made in advance, like rent or insurance for future months.

These assets are short-term and keep the business running smoothly from day to day.

2. Fixed Assets (Long-Term Assets)
Fixed assets are items that a company owns and uses for many years to help operate the business.
They are not meant for resale, but they help the company generate income over time.
Examples:

Buildings or factories where the company operates
Machines or equipment used for production
Company vehicles like delivery vans
Office computers and furniture
Intangible items such as copyrights, patents, or trademarks

A single asset can sometimes be considered both current and fixed, depending on how it’s used.
For example, a car dealership treats cars for sale as current assets (inventory), but the manager’s company car is a fixed asset.

How Fixed Assets Are Treated in Accounting
When a company buys a fixed asset, it’s not treated as a simple expense. Instead, it’s recorded as something valuable that belongs to the company. Here’s how it works step by step:

Recording the Asset
When a fixed asset is purchased, it’s added to the balance sheet as an asset, not as an expense.
This shows that the company now owns something of long-term value.
Value Over Time
Fixed assets are useful for many years, but their value slowly decreases as they’re used.
This reduction in value is called depreciation.
Depreciation
Depreciation is a way of spreading the asset’s cost over its useful life.
For example, if a computer costs $1,000 and will last five years, the company records $200 each year as depreciation.
The simplest way to calculate this is the straight-line method, where the total cost is divided evenly by the number of years the asset will be used.
Reviewing the Asset’s Value
Once a year (or more often), the company checks if the asset’s current value on the balance sheet still makes sense.
- If the asset has lost value (for example, due to market changes), a write-down is recorded.
- In some countries, if the asset’s value increases, a write-up can be recorded — though not all accounting systems allow this.
Disposing of the Asset
When the company no longer needs the asset — for example, if it’s sold or scrapped — it must be removed from the books.
The original cost and the total depreciation are reversed, and any gain or loss from the sale is shown in the Profit and Loss Statement.

Example
Imagine a company buys a delivery truck for $50,000.

It records $50,000 as a fixed asset on the balance sheet.
Each year, it records $10,000 as depreciation expense (if the truck’s life is 5 years).
After 5 years, the truck’s book value becomes zero.
If the company sells the truck for $5,000, that amount becomes profit on sale of asset in the accounts.

Relationships between fixed assets components

Fixed Assets Simple Explanation
In a company, fixed assets such as buildings, vehicles, and machinery are tracked carefully to understand their value over time.
In Dynamics 365 Finance, the fixed assets setup has different parts that work together.
Each part has its own role, from organizing assets to posting accounting entries.

1. Fixed Asset Groups
Asset groups are used to keep similar types of assets together.
For example, you might have one group for vehicles, another for computers, and another for machinery.
Each group has default settings like depreciation rules and accounts.
When you add a new asset, it automatically follows the group’s settings.

2. Books
A book is where the system tracks the financial life of an asset and how its value changes over time.
Each asset can have one or more books:

One book can be used for company financial reports (it posts to the general ledger).
Another book can be used for tax records (it doesn’t post to the general ledger).

This allows a company to maintain separate values for tax and accounting purposes when needed.

3. Depreciation Profiles
Before creating books, you must set up depreciation profiles.
A depreciation profile decides:

Which depreciation method will be used (like straight-line or reducing balance)
Whether the calculation is based on the calendar year or fiscal year
How often depreciation is calculated (monthly, quarterly, or yearly)

Example: If a machine costs $12,000 and has a useful life of three years, the straight-line method will expense $4,000 each year.

4. Alternative and Extraordinary Depreciation
Sometimes you need to apply different or additional depreciation methods:

Alternative depreciation means the system automatically switches to another method if it gives a higher depreciation amount.
Extraordinary depreciation is used for unexpected situations, such as when an asset loses value due to damage or a natural disaster.

5. Derived Books
A derived book is like a copy of your main book.
When a transaction such as acquisition or disposal is posted in the main book, the same entry is automatically made in the derived book.
This helps keep consistent data for both corporate and tax reporting.

6. Posting Profiles
Posting profiles tell the system which general ledger accounts to use for each asset transaction.
They control where amounts are recorded in accounting.
You can set posting profiles for each book, asset group, or even for specific assets.
Example: When depreciation is posted for a truck, the posting profile ensures that the depreciation expense goes to the correct expense account and the accumulated depreciation account is updated.

7. Disposal and Gain or Loss
When an asset is no longer useful, either sold or scrapped, it must be removed from the system.
The system reverses its cost and accumulated depreciation, and any remaining balance becomes a gain or loss.

If the company sells an asset for more than its book value, it records a gain.
If it sells for less, it records a loss.

Summary

Part	Purpose
Asset Group	Organizes assets and provides default rules
Book	Tracks value and depreciation of each asset
Depreciation Profile	Defines how value decreases over time
Alternative/Extra Depreciation	Used for special situations
Derived Book	Creates automatic copies of main transactions
Posting Profile	Links transactions to correct accounting accounts
Disposal	Handles selling or scrapping of assets and records gain or loss

Configure fixed assets components
Fixed Assets Setup – Simple Explanation
When you create a new fixed asset in the system, the Fixed asset group field is the only required field.
The group you select automatically fills several default details for that asset.
Each group has one or more books, and each book can have its own settings such as service life and depreciation method.
This helps make sure that all assets in the same group follow the same accounting rules.
You can also set up special depreciation allowances (also called bonus depreciation) for certain asset groups.
If there is more than one allowance for a book, you can give them a priority so the system knows which one to apply first.

Fixed Asset Rules
Every company follows certain rules for managing fixed assets. These rules help maintain accuracy, control, and compliance.

Here are some common rules:

Capitalization Rule
An item is considered a fixed asset only if its value is above the company’s capitalization limit.
For example, if the limit is $1,000, any purchase below that amount is treated as an expense, not a fixed asset.
Depreciation Rule
Each asset type must follow a specific depreciation method and useful life.
For example, computers may depreciate over three years, while buildings may depreciate over twenty years.
Asset Tagging Rule
Every fixed asset should have a unique ID or tag number.
This helps in tracking, auditing, and reporting.
Review and Adjustment Rule
The value of assets should be reviewed at least once a year.
If the market value drops or rises significantly, adjustments like write-downs or write-ups are made as allowed by accounting standards.
Disposal Rule
When an asset is sold, damaged, or no longer in use, it should be properly disposed of in the system.
The gain or loss from the sale is recorded in the profit and loss statement.
Security and Approval Rule
Only authorized users should be able to create, modify, or dispose of assets.
Approval workflows can be used to control this process.
Audit and Reporting Rule
Regular reports and audits should be performed to confirm that the fixed asset register matches physical assets.

Journal Names
In the Journal names setup, you can create journal names that are used for the Fixed assets journal.
When you create a journal name, set the Journal type to Post fixed assets and select a Voucher series.
Each fixed asset transaction should have its own voucher number.
This ensures that automated transactions such as transfers and splits are handled correctly.

Fixed Assets Parameters
The Capitalization threshold setting decides which assets will be depreciated.
If a purchase is below this amount, the system still creates a fixed asset record, but depreciation will not be automatically calculated.
When you turn on Automatically create depreciation adjustment amounts with disposal, the system adjusts depreciation automatically when the asset is sold or removed.
You can also choose to deduct cash discounts from the acquisition amount when the asset is purchased from a vendor.

Purchase Order Settings
On the Purchase orders tab, you can control how fixed assets are created during the purchasing process.

If you enable Allow asset acquisition from Purchasing, the asset is acquired automatically when the invoice is posted.
If this option is off, you can still add an asset on a purchase order or invoice, but it won’t be acquired automatically.
In that case, you must post the acquisition later from the Fixed assets journal.

You can also turn on Create asset during product receipt or invoice posting.
This allows the system to automatically create a new asset while posting, even if it was not created earlier.
The last option, Check for fixed assets creation during line entry, applies only to purchase requisitions.

Reason Codes and Number Sequences
You can set up reason codes to make them mandatory whenever a fixed asset is changed or a transaction is posted.
This helps track the reason behind every change or movement of assets.
In the Number sequences setup, you can define numbering rules for fixed assets.
Each asset gets a unique number.
If a number sequence is defined at the group level, it will replace the general fixed asset numbering.
Derived Books
Derived books help you post fixed asset transactions automatically at regular intervals.
You can select one main book called the primary book, usually used for accounting depreciation. Then, you can attach derived books to it. These derived books automatically post transactions (like acquisitions, adjustments, and disposals) whenever you post them in the primary book.
For example:
If Book A is your primary book and Books B and C are derived books, and you record an acquisition of 1,500 in Book A, the same entry is automatically posted in Books B and C.
This helps maintain consistency across accounting and tax records without having to post transactions separately.

Depreciation Profiles
Depreciation profiles define how depreciation is calculated for each asset. These are used for assets that lose value over time, such as equipment, vehicles, or buildings.
Some common depreciation methods include:

Straight line (equal amount every period)
Reducing balance (higher depreciation in earlier years)
Manual or consumption-based methods

The value of an asset that can be depreciated is its cost minus any scrap value. You can create different profiles depending on company needs.

Posting with Derived Books
When you post a transaction for the primary book, the related derived book transactions are also posted automatically.
For example, if you post an acquisition through a purchase order or a journal, the system posts matching transactions for the derived books.
However, accounts such as sales tax, customer, or vendor accounts are only updated once (from the primary book).
Derived books are useful when you need to maintain different types of depreciation records, such as for tax and accounting purposes.

Posting Fixed Asset Transactions to Layers
Each book is linked to a posting layer, which defines the purpose of that depreciation — for example, accounting, operations, or tax reporting.
There are ten posting layers available:
Current, Operations, Tax, and seven custom layers.
If a book is used only for reporting (not for financial postings), you can set it not to post to the general ledger. This gives you flexibility to delete historical transactions when needed.
Each journal name in the system is tied to one posting layer. This ensures that every transaction is recorded in the correct layer and avoids confusion.
You can also define which ledger accounts should be used for different transaction types (such as acquisition, depreciation, or disposal) in the Fixed Asset Posting Profiles page.

Fixed Asset Mass Update
If your organization uses books, you can update depreciation settings for a group of assets at once.
For example:
If more than 40% of your assets are added in the last quarter of the year (in the U.S.), you must use the mid-quarter depreciation convention.
You can run a mass update to change the convention for all applicable assets.
When you update depreciation conventions, the system removes old depreciation and adjustment transactions and applies the new rules.
If any assets have already been sold or disposed of, you need to delete those disposal transactions before making updates.
After that, you can process new depreciation or make manual adjustments where needed.

Summary

Derived books simplify multiple postings.
Depreciation profiles define how asset value decreases over time.
Posting layers separate accounting, tax, and operational depreciation.
Mass updates help apply depreciation changes to multiple assets easily.

Fixed Asset Groups
Fixed asset groups are used in Dynamics 365 Finance to organize and manage assets that share similar characteristics. Each fixed asset must belong to a group. The group defines default settings, such as depreciation profiles, books, and posting accounts, so you don’t have to set them up individually for every asset.
Think of an asset group as a category, like “Vehicles,” “Office Equipment,” or “Buildings.” When you add a new fixed asset to a group, it automatically gets the same accounting rules and depreciation setup as other assets in that group.

Purpose of Fixed Asset Groups
The main goal of using fixed asset groups is to make asset management easier and consistent.
By grouping similar assets, you can:

Apply the same depreciation rules automatically.
Simplify reporting and analysis.
Post accounting entries consistently.
Save time when creating new assets.

Example
Imagine your company owns several delivery trucks.
You can create a fixed asset group called “Vehicles.”
In that group, you define:

Depreciation method: Straight-line over 5 years.
Book: Accounting Book and Tax Book.
Posting profile: Accounts for acquisition, depreciation, and disposal.

Now, whenever you add a new truck, it automatically follows these same rules.
You don’t need to set up depreciation or posting accounts again.
Similarly, you might create other groups like:

Computers and Equipment – depreciated over 3 years.
Buildings – depreciated over 25 years.
Furniture – depreciated over 7 years.

Key Points

Each asset must belong to one fixed asset group.
Each group is linked to books (for depreciation) and posting profiles (for accounts).
You can run depreciation or reports by group for easier management.
Changing a group affects all assets under it, so groups should be planned carefully.

Example in Practice
A company has the following groups:

FA001 – Vehicles
FA002 – Office Equipment
FA003 – Buildings

When you create an asset in FA001 (Vehicles), the system automatically:

Links it to the “Vehicle” depreciation profile.
Connects it to the correct accounts in the posting profile.
Assigns the useful life and scrap value from the group setup.

So, if you record a new delivery van, you don’t need to define all these settings again — the group handles it for you.

Enable Fixed Asset Integration
Fixed assets can be integrated with several modules in Dynamics 365 Finance, including General Ledger, Inventory Management, Accounts Receivable, Accounts Payable, and Project Management and Accounting. This integration helps keep asset data accurate across all financial processes.

General Ledger
In General Ledger, the total value of all fixed assets is recorded in specific main accounts for reporting purposes.
Each time a transaction is posted for a fixed asset, such as acquisition or depreciation, the correct main accounts are automatically updated.
You can define which main accounts are used for each type of transaction on the Fixed asset posting profiles page.
This allows you to control the level of detail that appears in the general ledger, based on transaction types or books.

Inventory Management
Fixed assets can be acquired through inventory journals or purchase orders.
For example, if a company builds its own machinery, the inventory journal can be used to transfer the value of materials into a fixed asset record.
When using purchase orders, the Allow asset acquisition from Purchasing option on the Fixed Assets Parameters page controls whether the acquisition is posted automatically when the vendor invoice is posted.
If this option is enabled, a new fixed asset is created and acquired directly from the invoice.
For internal-use assets (like office laptops), the system uses special accounts:

Fixed asset receipt – to record the purchase or creation of the asset.
Fixed asset issue – to record when the asset is issued internally.

The correct accounts depend on the setup of item groups, posting profiles, and whether the asset is constructed or purchased.

Accounts Receivable
Fixed assets can also be sold through Accounts Receivable using Free Text Invoices.
When you sell an asset, the system uses the posting profiles from Fixed Assets to determine which ledger accounts are updated.
If the book linked to the asset includes a derived book, the related derived book transaction is automatically created when the customer invoice is posted.

Accounts Payable
Most fixed assets are purchased from vendors.
You can decide whether the asset acquisition is posted automatically when the vendor invoice is posted, or manually later through the Fixed Assets journal.
When you choose automatic posting, the acquisition follows the setup of posting profiles in the Fixed Assets module.
Each transaction updates the correct accounts based on the asset, book, and transaction type.
The integration for each order line is controlled from the Fixed assets tab in the Purchase Order’s Line Details section.

Project Management and Accounting
Projects can also be linked to fixed assets.
You can associate a project, phase, or task with a specific asset by entering the fixed asset number on the project record.
This is often used for projects related to construction, maintenance, or improvements of an asset.
When the project is finished, the system doesn’t automatically create a write-up adjustment, but you can post it manually if required.
If the project involves building or manufacturing an asset, the acquisition can be posted automatically at the end of the estimate project.

Summary
By enabling fixed asset integration:

All asset transactions flow smoothly between financial modules.
Asset values are always reflected in the General Ledger.
Acquisitions and disposals can occur directly through purchase orders or invoices.
Project-related assets are tracked and updated consistently.