Fixed Assets

Fixed assets are non-current assets that are long-term tangible or intangible pieces of property or equipment that a firm owns and uses in its operations or functioning that could generate income. The general insight about fixed assets is that they’re expected that the life of such assets lasts longer for more than a minimum period of one year. As such, companies are ready to depreciate the worth of those assets to account for natural wear and tear if applicable. 

Fixed assets ordinarily appear on the balance sheet under assets as property, plant, building and equipment (PP&E) head. Fixed assets have a debit balance and are classified into two types which are tangible and intangible assets. Fixed assets are needed to depreciate to account for the loss in value because the assets are depreciated, whereas intangibles are amortized or written off.

Definition of Fixed Assets

Fixed assets are the tangible and intangible assets that are employed by businesses for more than a period of one year other than non-current investments and help in generating income. Fixed assets help the firm with future economic gains as they have a lifespan of more than one year. Fixed assets are also called capital assets and are generally denoted by the Property, Plant and Equipment. Fixed assets cannot be easily converted into cash and are not liquid.

Characteristics of Fixed Assets

1. They have a useful life of more than one year as these are non-current assets.

2. Except for land, all other fixed assets are depreciated in order to reflect the wear and tear of their usage in the business.

3. They are used in business operations or functioning that provide a long-term financial benefit as these are employed by the corporate to supply goods and services and generate revenue.

Types of Fixed Assets

1. Tangible Assets – The asset that has a physical existence such as land, buildings and machinery.

2. Intangible Assets – Brand, property rights, goodwill, copyrights, trademarks, patent rights, and trade secrets are some examples of intangible assets.

3. Freehold Assets – Assets that are purchased with the legal right of ownership and used for a long time.

4. Leasehold Assets – Assets used by the owner without the legal right for a particular period of time by paying royalty.

Examples of Fixed Assets

• Land Includes the purchased cost of land, and may also include the cost of land improvements

• Computer equipment used in the management of firm accounts like laptops and desktops

• Computer software usually only includes the most expensive software

• Construction in progress is an accumulation account in which the costs of construction are recorded and once an asset is completed, the balance is transferred to a fixed asset account

• Furniture and fixtures include tables, chairs, filing cabinets, and desks

• Buildings and Machinery typically include all plants and accommodation owned by the entity

• Leasehold improvements include the prices incurred to renovate leased space and royalty

• Office equipment includes printers, and scanners but not computers or software (for which there’s a separate account)

• Intangible assets such as goodwill, patents, licenses, and copyrights

• Vehicles include company motorbikes, cars, trucks, and more specialized vehicles such as forklifts

Accounting Treatment for Fixed Assets

Fixed assets are initially recorded as assets, and are then subject to the subsequent general types of accounting transactions:

Balance Sheet

A fixed asset is capitalized. When a corporation purchases an asset, they record the value as an asset on the balance sheet instead of writing it onto the income statement. 

Income Statement

Except for the land, all other fixed assets are depreciated. This is to reflect the wear and tear and tear from using the fixed asset within the company’s operations. Depreciation shows up on the income statement on the debit side and it reduces the company’s net profit.

Statement of Cash Flow

When a corporation purchases or sells an asset with cash, that’s reflected within the investing activities section of the income statement.

Conclusion

The fixed assets are expected to last, be consumed, or be converted into cash after a minimum of one year. Fixed assets are long-term tangible or intangible pieces of buildings, plants, machinery and equipment that a firm owns and uses in its operations to generate income. As such, companies are ready to depreciate the worth of those assets to account for natural wear and tear. Fixed assets are the more permanent assets that are intended to be used within the business, rather than for sale. Some of the fixed assets needed during a new business might include machinery and equipment, buildings, and land. They are accountable for depreciation shown in the income statement and are shown on the balance sheet. They determine the cash flow position of the company and its future growth depends on it.