Definition
A fixed asset is a long-term tangible asset that a company owns and uses in its operations to generate income. These assets are not intended to be sold but are used or depreciated for several years like buildings, plant equipment, and vehicles. Fixed assets are stated on the company’s balance sheet at their net book value, which is the original cost less accumulated depreciation.
Phonetic
The phonetics for the keyword “Fixed Asset” are:Fixed: /fɪkst/Asset: /ˈæsɛt/
Key Takeaways
- Value Retention: Fixed assets, also known as tangible assets or property, plant, and equipment (PP&E), are long-term assets that a company uses in the production of its income, such as lands, buildings, machineries, and vehicles. They are expected to provide benefits for more than one year, hence retaining their value over time.
- Depreciation: Despite their ability to retain value over extended periods, fixed assets are subject to depreciation. This is the loss of value over time due to aging, wear and tear, or obsolescence. Depreciation is spread out over the estimated useful life of the fixed asset and is a way to match the cost of the asset with the revenue it generates.
- Financial Reporting: Fixed assets are accounted for on a company’s balance sheet and are crucial in financial reporting. They are part of a company’s total assets and have an impact on financial ratios, overall asset value, and the business’s potential for future earnings. Their management, therefore, becomes crucial in ensuring correct representation of the company’s financial status.
Importance
Fixed assets are crucial in business and finance because they represent a significant investment from a company that is integral to its operations and generation of income. These are items like buildings, land, equipment, and machinery that are not intended for sale but to be used for a long-term basis, usually over a period exceeding a year. The treatment of fixed assets in accounting – including their purchase, maintenance, depreciation, and disposal – impacts the company’s financial statement, balance sheet, and tax liability, making them an essential aspect in understanding the company’s financial health and valuation. Consequently, the management of fixed assets is vital for the company’s strategic planning and ongoing operations.
Explanation
Fixed assets are an essential element in the operations of many businesses, providing the necessary infrastructure for the organization to produce goods or services, and facilitating its day-to-day functions. These are long-term tangible assets like machinery, property, equipment, and office buildings that cannot be readily converted into cash. Fixed assets are used for the purpose of carrying out the core business activities, with their efficient use often being directly linked to a firm’s ability to generate revenue. For instance, a manufacturing company requires machines to produce its goods, and a real estate firm needs properties to earn rental income. Aside from enabling business operations, fixed assets also influence a company’s strategic planning and decision making. They form a significant part of an organization’s balance sheet, indicating its investment in assets that will be utilized over several years. Moreover, regular maintenance and strategic decisions regarding fixed assets, such as when to upgrade or dispose of them, affect both short-term operating expenses and long-term capital investment. In essence, fixed assets establish the foundational framework that supports a company’s operations and its prospects for future growth.
Examples
1. Commercial Real Estate: Buildings such as office complexes, manufacturing facilities, warehouses, and retail stores are examples of fixed assets. They are part of the long-term tangible properties that a firm owns and uses in the operations of its business and are not expected to be consumed or converted into cash any sooner than at least one year’s time.2. Vehicles: Trucks, cars, ships, and airplanes used by a company for delivery of goods or other business operations are classified as fixed assets. These assets continually provide value to the company but their cost is spread out over their useful life using depreciation.3. Machinery and Equipment: Manufacturing or production companies often purchase heavy machinery and equipment for the production of their goods or services. These machines are expected to last several years and contribute to the company’s income. Their cost is spread across their useful lifespan.
Frequently Asked Questions(FAQ)
What is a Fixed Asset?
A fixed asset is a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income.
What are examples of Fixed Assets?
Fixed Assets often include real estate, buildings, machinery, vehicles, furniture, and equipment.
How does a Fixed Asset differ from a Current Asset?
Unlike current assets like cash or inventory, fixed assets are not intended to be sold for at least one year. They are used over a longer term and are considered less liquid.
How are Fixed Assets treated in financial accounting?
In financial accounting, fixed assets are typically recorded on the balance sheet and depreciated over their useful lives.
What is depreciation in the context of Fixed Assets?
Depreciation is the process of allocating the cost of a fixed asset over its useful life. This takes into account the fact that fixed assets typically lose value as they get older.
What is the importance of Fixed Assets to a business?
Fixed assets are important because they are substantial investments that a business uses to generate its income. They provide the means for businesses to produce their goods or services.
Can intangible items be considered Fixed Assets?
No, intangible items, such as patents or copyrights, do not count as fixed assets in a traditional sense, but they are considered long-term assets. They are typically listed separately on a company’s balance sheet.
Do Fixed Assets include land?
Yes, land is considered a fixed asset. However, unlike other fixed assets, it is not depreciated because it does not lose value over time.
When and why do companies dispose of Fixed Assets?
Businesses may dispose of fixed assets for various reasons, like if the asset is outdated or can’t generate sufficient income. When an asset is sold, it is removed from the company’s balance sheet.
How does the acquisition of a new Fixed Asset impact a company’s finances?
The acquisition of a fixed asset is a capital expenditure. It will increase the company’s asset base on the balance sheet and may also lead to increased depreciation expense over time.
Related Finance Terms
- Depreciation
- Capital Expenditure
- Tangible Asset
- Amortization
- Net Book Value
Sources for More Information
