Fixed Assets

What is a Fixed Asset?

Fixed assets are long-term, tangible property that a company owns and uses to help run its business and make money. They are recorded on the balance sheet under property, plant, and equipment (PP&E). Unlike inventory or supplies, fixed assets aren't meant to be sold or for immediate consumption; they are intended for use over several years. Companies can depreciate these assets over time to reflect their gradual wear and tear. 

Here's the formula for net fixed assets:

Net fixed assets = total fixed assets - accumulated depreciation 

Example:

Let’s say a company has total fixed assets of $700.000 and accumulated depreciation of $200.000. Here’s the calculation based on the formula:

Net fixed assets = Total fixed assets - Accumulated depreciation

  • Net fixed assets = $700,000 - $200,000
  • Net fixed assets = $500,000 

Therefore, $500,000 indicates the total value of the company's fixed assets after accounting for accumulated depreciation.

Examples of fixed assets

Fixed assets include land, machinery, tools, buildings, computer equipment, software, furniture, machinery, and vehicles.

While the list above includes examples of fixed assets, not all businesses consider them fixed assets, put differently, a fixed asset that qualifies as such for one business might not qualify as a fixed asset for another business.

For instance, a company parking lot established by the business is considered a fixed asset. However, Personal cars used for commuting are not regarded as fixed assets.

Characteristics of a fixed asset 

Fixed assets are distinguished from other forms of assets by several essential features.  A characteristic of fixed assets is that it is:

Long-term use

When bought, fixed assets are usually used for more than a year. They are essential to the long-term operations of the business and are not intended for immediate consumption or sales.

Physical existence

Fixed assets are visible and tangible, in contrast to intangible assets. They can be seen, touched, and physically identified. 

Cost

Fixed assets are generally associated with large initial expenditures or investments for purchase, installation, and setup.

Value generation

Throughout their valuable lives, fixed assets are expected to add value or bring in money for the business.

Depreciation

Fixed assets lose value over time due to continual usage, technological obsolescence, and other issues. To reflect this decrease in value, businesses employ depreciation, which spreads the asset's cost over its useful life on the income statement and balance sheet.

Deployed in business operations

Fixed assets play a crucial role in a company's long-term operations. They are not just tools or equipment but the backbone of a business. The company's daily operations rely on fixed assets to support its primary business operations. Fixed assets support all operations, including service delivery, facility management, and product manufacturing.

Ownership & control

The company is the owner and controller of fixed assets. They are a part of the company's long-term asset base and are neither exchanged as financial instruments nor kept for sale as inventory.

Not a liquid asset

On a company's balance sheet, fixed assets are non-current assets that are difficult to convert into cash.

Importance of fixed assets

Essential for business operations

  • Fixed assets are crucial for any business to operate effectively and drive sales.
  • They help a company generate revenue and sustain its operations.

Investor consideration

  • Investors carefully evaluate fixed assets before deciding to invest in a company.
  • The fixed asset turnover ratio is a key metric for assessing the effectiveness of fixed assets in generating sales.

Competitive advantage

  • Efficient use of fixed assets gives businesses a competitive edge over their rivals.
  • Understanding what qualifies as a fixed asset helps investors accurately assess a company’s value.

Success and stability

  • Fixed assets are vital for a company's long-term success and stability.
  • They reflect the firm’s potential for growth and expansion on the balance sheet.

Trust and financing

  • Good management of fixed assets builds trust with lenders, investors, and business partners.
  • This trust can lead to better access to financing and more favourable terms.

Different types of fixed assets

Fixed assets can be divided into categories based on their nature, purpose, and attributes. Understanding these categories and their characteristics is essential for a comprehensive understanding of fixed assets. Common types of fixed assets consist of:

Property, plant, & equipment (PP&E)

Tangible assets used in operating a business fall under this category. These include land, buildings, vehicles, furniture, machinery, and equipment.

Natural resources

Natural resources are fixed assets with economic value originating from natural sources. Examples include water rights, mineral deposits, timberlands, and oil reserves.

Investment or acquiring other companies

Companies may own a large number of other businesses as part of their long-term investment plan. These ownership stakes are regarded as fixed assets.

Financial investments

These fixed assets are investments made by the corporation in securities or long-term bonds, among other financial instruments, which it plans to hold for an extended period.

Read more about Inkle Tax. 

Key takeaways

Understanding the concept of fixed assets is crucial for business professionals, investors, and individuals interested in financial management and accounting. Any long-term tangible asset or piece of equipment that a business owns and uses to generate revenue is termed a fixed asset. These assets, which are reflected on the balance sheet as property, plant, and equipment, are not anticipated to be sold or used within a year. Intangible assets are amortised, while fixed assets are subject to depreciation, which accounts for their gradual decrease in value.  

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