Fixed Assets

A long-term tangible asset used in operations, such as equipment or property.

QUICK ANSWER

A fixed asset is a long-term tangible asset that a business owns and uses in its operations to generate revenue over an extended period, typically more than one year. Fixed assets are not intended for sale in the normal course of business and include items such as land, buildings, machinery, vehicles, and office equipment.

In depth

Fixed assets are recorded on the balance sheet at their original purchase cost and are subject to depreciation over their useful lives, with the exception of land which is not depreciated. The net book value of a fixed asset at any point in time is its original cost minus the accumulated depreciation recorded to date. Businesses are required to maintain a fixed asset register that tracks each asset's acquisition date, cost, depreciation method, useful life, and current book value, providing an accurate record for both accounting and tax purposes.

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Managing fixed assets effectively has significant implications for both financial reporting and operational efficiency. Overinvesting in fixed assets can tie up large amounts of capital that could otherwise be deployed more productively, while underinvesting can lead to outdated equipment that hampers productivity and increases maintenance costs. For tax purposes, accelerated depreciation methods and provisions like Section 179 in the US allow businesses to deduct a larger portion of an asset's cost in the year of purchase, reducing taxable income in the near term. Regular reviews of the fixed asset register to identify fully depreciated, idle, or disposed assets ensure that the balance sheet remains accurate and reflects the true state of the business's physical resources.