What are Fixed Assets – Definition, Characteristics and Examples
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Fixed assets Definition
Fixed assets refer to long-term tangible assets that are used in the operations of a business.
They provide long-term financial benefits, have a useful
life of more than one year, and are classified as property, plant, and equipment (PP&E) on the balance sheet.
Fixed assets provide the firm with long term financial gain as they have a useful life of more than one year. Fixed assets are also known as capital assets and are denoted
by the term Property, Plant and Equipment in the balance sheet. Fixed assets cannot be easily converted into cash.
Important of Fixed Assets
Fixed asset information helps in the valuation of the business and forming accurate financial reports with the help of financial analysis.
Using such reports financial health of a company can be determined by the Investors and creditors that help them to decide when to buy shares or give a loan to the business.
At the time of analyzing financial statements, you need to check the notes to accounts carefully as different business uses different methods of recording. Some of the commonly accepted methods of recording are depreciation and asset disposal method.
Types of Fixed Assets and examples
Tangible Assets:
Tangible asset is an asset that has a physical existence. Tangible assets examples are land, buildings and machinery.
Example of Tangible fixed Assets
Plant & Machinery
Land
Building
Intangible Assets:
An intangible asset is an asset that doesn’t possess a physical existence. Brand recognition, intellectual property, goodwill and such as copyrights, trademarks, and patents are all examples of intangible assets.
Example of intangible fixed Assets
- Goodwill
- Patents
- Copyrights
- Trademarks
Depreciation of Fixed Assets
Depreciation is that part of a cost of the fixed asset that is recorded as an expense during a financial year. In other words, depreciation of fixed assets shows such part of its value utilized during the financial year.
There are different ways to calculate depreciation on fixed assets. Some of the common ways that are used by the business are
- Straight Line Method
- Diminishing Value Method
- Units of Production
- Sum of Years Digits
Fixed Asset Formula
Net Fixed Assets = Total Fixed Assets – Accumulated Depreciation
Characteristic of Fixed Assets
Key Characteristics of a Fixed Asset
The key characteristics of a fixed asset are listed below:
1. They have a useful life of more than one year
Fixed assets are non-current assets that have a useful life of more than one year and appear on a company’s balance sheet as property, plant, and equipment (PP&E).
2. They can be depreciated
With the exception of land, fixed assets are depreciated to reflect the wear and tear of using the fixed asset.
3. They are used in business operations and provide a long-term financial benefit
Fixed assets are used by the company to produce goods and services and generate revenue. They are not sold to customers or held for investment purposes.
4. They are illiquid
Fixed assets are non-current assets on a company’s balance sheet and cannot be easily converted into cash
Accounting for Fixed Asset
Accounting for fixed assets involve recording of several transactions for fixed assets which can be as follows:
Recording of asset : This is the first type of accounting entry for the purchase of the asset. In case the asset is purchased with credit, then the entry will be a credit to the account payable and debit will be on the respective fixed asset account.
Depreciation: Fixed assets undergo depreciation with time in accounting. Several methods are used to determine depreciation. Of the methods, straight line method is the most popular method.
An asset based upon it’s useful life will function in the organisation. After that period it must be scrapped or sold. It is performed by debiting the accumulated depreciation account of all depreciation charges and crediting the respective fixed asset account.
FAQ
Is Calculator a fixed asset?
The calculator is treated as an expense for the business because it value is little and it does not affect the balance sheet.
Why fixed assets are important?
Fixed assets can represent a significant part of the small business net worth captured on the balance sheet. As such, they are important in the presentation of financial position. Some fixed assets depreciate – ie they reduce in value as they age