Fixed assets in Australian manufacturing
Fixed assets represent physical, long-term resources for the functioning of manufacturing businesses in Australia. Typical fixed assets in this industry include machinery, equipment, facilities, vehicles, and land.
These resources are required in the production of goods, inventory storage, product transportation, and the overall manufacturing workflow. For example, machinery and equipment are utilised on production lines to convert raw materials into finished products.
Facilities like factories and warehouses offer the necessary space for production, storage, and administrative activities. Vehicles, including trucks and forklifts, facilitate logistics by moving goods and materials.
Fixed assets are represented differently across various financial statements. In the balance sheet, they are categorised as “non-current assets” and recorded at their historical cost, adjusted for accumulated depreciation and any impairments. This approach reveals their net book value, which signifies the remaining economic worth of the assets. Notably, land is exempt from depreciation because it possesses an indefinite useful life.
Fixed assets influence financial performance on the profit and loss (P&L) statement through the process of depreciation. Depreciation is the methodical distribution of an asset’s cost throughout its useful life, accounting for factors such as wear and tear or obsolescence. This expense is categorized under operating expenses and serves to lower taxable income. For instance, if a manufacturing firm acquires a machine for AUD 100,000 with an expected lifespan of 10 years, using the straight line / prime cost method would record an annual depreciation expense of AUD 10,000.
Regular maintenance expenses for fixed assets are also recorded on the P&L as incurred. Accurate tracking and accounting for fixed assets ensure compliance with IFRS and ATO tax rulings and help businesses assess profitability and manage resources efficiently.
Depreciation strategies for fixed assets – generally
Depreciation strategies are essential for allocating the cost of fixed assets over their useful lives. The choice of depreciation method can significantly impact financial reporting and tax outcomes. Below are the most common strategies:
Straight-line / prime cost depreciation: This is the simplest and most widely used method. It allocates an equal portion of the asset’s cost to each accounting period over its useful life. For example, an asset with a cost of $50,000 and a 10-year useful life would have an annual depreciation expense of $5,000. This method is suitable for assets that experience consistent usage over time, such as office buildings or furniture.
Diminishing value (declining balance) method: This method applies a fixed percentage to the asset’s carrying amount, resulting in higher depreciation expenses in earlier years. It is often used for assets that lose value more rapidly in their initial years, such as machinery and vehicles.
Units of production (units of use) method: Depreciation is based on actual usage or output, making it ideal for assets whose wear and tear depend on production levels, like factory equipment.
Each method must align with the asset’s usage pattern and comply with the IFRS accounting standard and Australian Tax Office (ATO) regulations. Selecting an appropriate strategy ensures accurate financial reporting and optimal tax planning.
Depreciation for manufacturing businesses
Manufacturing businesses often rely on depreciation strategies to accurately allocate the cost of fixed assets while preserving value on the balance sheet. The most effective strategies depend on the nature and usage of the assets.
Straight-line / prime cost depreciation is ideal for assets with consistent utility over their lifespan, such as factory buildings and furniture. It ensures stable and predictable expense recognition, which helps maintain a balanced financial outlook.
Diminishing Value (Declining Balance) depreciation is suited for machinery and vehicles that experience significant wear and tear or obsolescence in the early years. By recognising higher depreciation initially, businesses reflect the rapid decline in asset value while aligning expenses with revenues generated during the asset’s peak productivity.
Units of production (units of use) depreciation is optimal for equipment whose usage fluctuates based on production levels. This approach ties depreciation directly to operational output, providing a realistic representation of asset utilisation.
To preserve value on the balance sheet, businesses should regularly review asset conditions and re-assess useful lives if necessary.
Combining accurate depreciation strategies with proper maintenance ensures assets retain best possible value, supporting long-term financial stability and compliance with accounting standards. A tailored approach enhances transparency and fosters informed decision-making.
Appropriate value of fixed assets on the balance sheet best prepares a business for borrowing cash and to prepare for either an investment or a sale event.
Manufacturing accounting software
Subscribing to AssetAccountant, which is fixed asset depreciation and lease accounting software, is best practice for businesses of all sizes due to its efficiency, accuracy, and compliance capabilities.
Managing fixed asset accounting manually or with spreadsheets can be time-consuming and prone to error, especially as a business grows and its asset portfolio becomes more complex.
AssetAccountant automates the calculation of depreciation, ensuring consistency with accounting standards such as AASB 116 and AASB 16 in Australia. This reduces the risk of non-compliance and financial misstatements. It also supports multiple depreciation methods and allows for easy revaluation or adjustment of asset values, helping businesses adapt to changes in asset usage or regulatory requirements.
In addition, the software provides centralised tracking and reporting of fixed assets and leases, offering real-time insights into asset performance, value, and financial impact.
Advanced integrations with accounting systems such as Xero, QuickBooks Online, Sage Intacct and Microsoft Dynamics 365 enhance workflows, streamline financial reporting, and reduce administrative burdens.
For businesses of any size, adopting AssetAccountant’s fixed asset depreciation and lease accounting software ensures accuracy, saves time, and ensures compliance.
It supports informed decision-making, allowing businesses to focus on strategic growth rather than the complexities of manual asset management.
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