What is a fixed asset? How do you calculate net fixed asset? How many types of fixed asset are there? What are the examples and characteristics of fixed asset? In this article, Viindoo will answer these questions for you to understand this fundamental term in accounting and finances.
What is a Fixed Asset?
A fixed asset can be described as a physical, long-term asset that a company owns and uses to generate income over a period of time. It is expected to last or be used in business operations for more than one year.
As a result, companies are allowed to account for the natural wear and tear of these assets by depreciating their value. Property, plant, and equipment (PP&E) are some examples of fixed assets that are commonly listed on the balance sheet.
What is a Fixed Asset?
Unlike current assets, which are expected to be converted to cash or used within a year, fixed assets are considered noncurrent assets, together with intangibles and long-term investments. The value of fixed assets depreciates as they are used, while the value of intangibles is amortized.
Fixed Asset Characteristics
Fixed assets are a vital component of any business that provides long-term benefits to the company. There are several key characteristics of fixed assets.
Fixed assets have a significant monetary value
They are considered to be high-value items that require a significant investment from the company. Therefore, a company must carefully assess and consider its options before acquiring such an asset. It is essential to ensure that the asset can provide long-term benefits to the company.
Fixed assets are tangible assets
This means that they have a physical presence and can be touched, felt, and seen. Some common examples of tangible fixed assets include land, buildings, equipment, machinery, and vehicles. Tangible assets can be difficult to value, as their worth can change over time. However, they are often more straightforward to manage and maintain than intangible assets.
What is a Fixed Asset? Fixed assets are tangible assets
Fixed assets are subject to depreciation.
As these assets are used over time, their value decreases due to wear and tear, obsolescence, or other factors. Depreciation is the method used to account for this loss in value, and it is recorded as an expense on the income statement. This expense reduces the asset's value on the balance sheet, providing a more accurate representation of its true value.
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Fixed assets are long-term assets
They are held by a company for a significant period, usually more than one year. These assets provide a stable base for the operations of a company and enable it to generate income. A company may use these assets to provide goods or services, rent or lease them out, or use them for production purposes.
Fixed assets are regarded as being illiquid
This is because they are intended to be used over the long-term to generate income for the company, rather than being purchased for the purpose of being sold in the near future. As a result, companies generally do not expect to sell their fixed assets in the short-term.
Fixed assets are regarded as being illiquid
Fixed assets are vital for a company’s success.
They enable a company to carry out its operations efficiently and effectively, and they provide a foundation for future growth. A company's fixed assets can be a significant source of value for the business and can provide a competitive advantage over other companies in the same industry. Therefore, it is crucial for companies to manage their fixed assets effectively with fixed asset software, ensuring they are maintained and upgraded to provide maximum value to the business.
Examples of fixed assets
There are various types of fixed assets, and they are typically recorded individually but classified as a group in the fixed asset accounts within a company's general ledger.
Examples of fixed assets: Machinery and equipment
Here are some common examples:
Buildings: This includes owned or leased properties that a company uses to conduct business operations.
Machinery and equipment: This refers to the equipment and tools a company uses to manufacture, produce or distribute goods or services. This can include manufacturing equipment, vehicles, computer systems, and office furniture.
Land: This is any land that a company owns, including undeveloped or developed land.
Furniture and fixtures: This refers to the furnishings and fixtures that a company uses in its day-to-day operations, including desks, chairs, shelving, and lighting fixtures.
Leasehold improvements: These are any improvements made to leased property, such as installation of new lighting, carpets, or renovations to existing space.
Computer software: This includes the purchased or developed software that a company uses to operate its business.
Infrastructure: This refers to the long-term investments that a company makes in its business infrastructure, such as roads, bridges, and other structures.
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How to calculate fixed asset
Calculating fixed assets is important, as it helps a company to accurately value its assets and determine their worth over time, hence managing its cash flow by identifying the expected depreciation of its assets over time.
Here's the formula for net fixed assets:
Net fixed assets = total fixed assets - (accumulated depreciation + liability)
Example:
Let's assume a company has total fixed assets of $500,000 and accumulated depreciation of $100,000. Using the formula for net fixed assets, we can calculate:
- Net fixed assets = Total fixed assets - Accumulated depreciation
- Net fixed assets = $500,000 - $100,000
- Net fixed assets = $400,000
Therefore, the net fixed assets of the company in this example is $400,000. This indicates the total value of fixed assets that the company holds after accounting for accumulated depreciation.
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FAQs
Can fixed assets be leased or rented?
Yes, businesses can lease or rent fixed assets instead of purchasing them outright. Leasing allows for the use of assets without ownership, providing flexibility and potentially reducing upfront costs.
How can businesses track and manage their fixed assets?
Businesses can use asset management software or spreadsheets to track and manage fixed assets. These tools help with recording asset details, tracking depreciation, scheduling maintenance, and generating reports for financial and regulatory purposes.
Can fixed assets increase in value over time?
While most fixed assets generally depreciate in value, certain assets, such as land or some types of intellectual property, may appreciate in value over time due to market conditions or other factors.
In the above article, Viindoo answered the question “What is fixed asset?” and give you related information about its definition, examples, formula, and characteristics. By accurately tracking and depreciating fixed assets, businesses can make informed decisions about investments, financing, and operations to achieve long-term success.
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