Fixed assets are any physical or tangible items that have monetary value and are purchased and owned by the business to support its operations. In general, these assets are expected to last, be consumed, or be converted into cash after at least one year.
Fixed assets can include buildings, equipment, machinery, tools, vehicles, computers, and furniture. These assets may also be referred to as capital assets.
An asset is any resource that provides monetary value to a business. It can help the business produce economic value and can be converted to cash. However, not all assets are fixed. For example, intangible assets, such as a logo or a customer database, are items that give the business value but are not physical.
Cash and accounts receivable are both assets, but they are not long-term physical possessions, so they are not fixed assets.
Physical assets may not be considered fixed if they do not last for more than a year. Disposable items and paper goods, for example, are physical items that would not be considered fixed assets because they do not last for more than a year.
A physical item is also not considered a fixed asset if it does not have significant economic value and would not be characterized as an investment, even if it can last for more than a year.
For example, clothing or notebook binders are tangible and may last more than a year, but they have low economic value and would not be considered a fixed asset. Instead, they would be written off as an expense for tax purposes.
Fixed assets are typically referred to in the balance sheet as “property, plant and equipment.”
They are listed among other assets, including cash, accounts receivable, and intangible assets.
Assets are usually classified into one of two categories, current and non-current. Current assets refer to those that are liquid, meaning they can be easily converted to cash in less than a year.
Cash and accounts receivable, for example, fall into the category of current assets.
Non-current assets refer to those that are not easily converted to cash in less than a year. They include long-term investments, deferred charges, intangible assets, and fixed assets.
Fixed assets vary depending on the type of business. For example, a company that delivers goods might purchase a fleet of vehicles while a carpet cleaning business would own cleaning equipment.
These are fixed assets. Land and buildings can also be considered a fixed asset. A company that owns a parking lot, for example, would consider the structure as a fixed asset.
A business will own fixed assets for one of several reasons:
Fixed assets help a business generate business revenue by creating goods or providing services. For example, machinery produces goods that can be sold. A business location can be used to provide services to a customer, such as a restaurant, nail salon, or movie theater.
Fixed assets can also be used to rent to another entity or individual to generate revenue for the business. A parking lot, for example, produces revenue to the owner from parking fees. An apartment building or commercial office space generates revenue from rents or leases.
A fixed asset may not generate revenue but aide in the operation of a business or organization. A headquarters building for a corporation or a trade group, for example, provides a central location for the operation to run.
Fixed assets may generate revenue as a sales item. A business that owns its headquarters building, for example, may decide to sell the building to generate cash.
Because of their monetary value, fixed assets can also be used as a collateral for a loan.
Fixed assets have the unique characteristic of losing value over time. They lose value either from wear and tear from use, as in the case of a vehicle, or from becoming outdated as advances in technology renders them less useful, as in the case of computer equipment
. A business will calculate this loss of value over time—this is called depreciation.
Depreciation is an accounting term that is used to spread the loss in value of an asset over multiple years and to offset this against its original purchase price, so the business can assess its true, or net, value.
Depreciation can be calculated using the straight-line method, which subtracts an equal amount each year over the life of the asset.
Alternatively, it may be calculated using the declining balance method, which subtracts a greater amount in the early years of the asset’s ownership when its value declines more rapidly, such as in the case of the purchase of a car. Less will be subtracted in later years when the value has declined substantially and more closely approximates its ultimate “salvage” value. This is the value the asset will have when it is sold at the end of its useful life to the business.
Net fixed assets in the balance sheet show the true value of a fixed asset minus its depreciation.
All businesses need fixed assets. They help the business generate goods, provide services, or run its general operations.
Fixed assets provide monetary value to the business.
They can be sold or used as a collateral and will be considered along with all other resources of monetary value in assessing the total value of the business by investors, banks, and auditors.
Fixed assets are usually recorded in the balance sheet with other non-current assets, in a category called “property, plant and equipment.”
Fixed assets are usually calculated as follows:
Total Fixed Assets – Accumulated Depreciation = Net Fixed Assets