When your organization purchases a piece of equipment or furniture, do you often find yourself confused about how to properly record it in your accounting system? You’re not alone! Capitalization – or recording a purchase as an asset, rather than an expense – can be a confusing concept for many nonprofit organizations. The best way to prevent this confusion is to develop a clear capitalization policy with a threshold for reporting fixed assets.
Fixed assets are tangible pieces of property or equipment with a useful life of more than a year. (For example: computers, printers, office furniture, vehicles, buildings and land, etc.) Office supplies like paper and packing tape are not considered assets, because you will likely use those up within a year. Assets may depreciate in value or break down over time, but they do not generally get “used up” like office supplies. Fixed assets are reported on your Statement of Financial Position rather than your Statement of Activities.
Your capitalization policy should include a capitalization threshold, or the specific dollar amount at which an item is recorded as fixed asset. Many mid-sized nonprofits have a capitalization threshold of $1000. That means that if your organization bought a new laptop computer that cost $1000 or more, it would be classified as an asset. If the computer cost less than $1000 it would be treated as an expense instead. It can be a lot of work to keep track of assets and properly account for them from year to year, so make sure your capitalization threshold makes sense for the size and type of your organization.
A good capitalization policy should include at least two things:
Criteria for recording fixed assets. For example, “Fixed assets must cost $1000 or more and have a useful life of more than a year. Any purchases not meeting both of these criteria will be recorded as an expense.”
Guidelines for keeping track of fixed assets over future years. For example, “The Executive Director will conduct an annual inventory of fixed assets and equipment leases, and will coordinate with the organization’s accountant to update financial records for disposals and depreciation.”
Remember, you can update your capitalization policy if your organization grows or changes. But you should always have a firm, written capitalization policy in place to help guide your decisions and prevent inconsistent bookkeeping.
