All businesses, regardless of their size or industry, possess assets that provide present and future value to their operations. The value of these assets is generally proportional to a company’s overall worth and is listed on its balance sheet. Essentially, the more assets a business has, the higher its total value is likely to be.
Fixed assets are a specific type of asset that provide long-term value to a company over multiple fiscal years. These assets are commonly referred to as property, plant, and equipment (PPE) and serve to support a business’s daily operations. Fixed assets are typically quite substantial, not only in terms of cost and physical size but also in the benefits they provide a company through their accounting treatment.
Fixed assets and intangible assets, such as patents, copyrights, and trademarks, are both considered noncurrent assets. While some may distinguish between “intangible fixed assets” and “tangible fixed assets,” the term “fixed asset” usually refers to tangible fixed assets, which is how we’ll refer to them in this article.
Understanding Fixed Assets: Definition and Classification
A fixed asset is a tangible asset that a company uses in its operations and has a long lifespan, such as machinery, factories, tools, furniture, and computers. These assets are listed in the noncurrent asset section of a company’s balance sheet because their useful lives extend beyond one year.
Fixed Assets vs. Other Asset Types
Assets are resources controlled by their owner, such as cash, machinery, and patents, and are one of seven accounting elements that include liabilities, equity, revenue, expense, gains, and losses. Assets are categorized based on their characteristics, such as their ability to be converted to cash, their use in operations, and their physical existence. Fixed assets are a subset of assets, known as Property, Plant, and Equipment (PPE), which are tangible assets that a company uses in its operations with a long lifespan, such as machinery, buildings, and equipment.
Differences Between Fixed Assets and Current Assets
Fixed assets and current assets are two types of assets that differ in the amount of time it takes to convert them to cash. Current assets are those that can be converted to cash easily within a year, such as inventory, money market accounts, securities, and accounts receivable. On the other hand, fixed assets are not expected to be converted to cash within a year due to their longer useful lives, which can range from several years to decades. Examples of fixed assets include manufacturing equipment, vehicles, buildings, and furniture. Unlike current assets, fixed assets are depreciated over their useful life. They are reported on a company’s balance sheet in the noncurrent asset section under Property, Plant, and Equipment (PPE).
Understanding Asset Classifications
Assets are the resources that a company owns and controls, ranging from tangible items like cash and machinery to intangible items like patents. Because of the vast range of assets a company can possess, it can be difficult to classify them in a meaningful way. Among the various subsets of assets are current assets and fixed assets (as explained earlier) as well as tangible and intangible assets.
For instance, inventory is considered a tangible asset, while accounts receivable and patents are intangible assets. In addition, assets are often classified as operating or non-operating, although these are not official balance sheet categories but rather descriptive terms. An operating asset is one that directly contributes to the company’s operations, such as an assembly line. A non-operating asset, such as the CEO’s company car, is less essential to the business and may be classified as “Other Assets.”
Differences Between Fixed Assets & Current Assets
| Current Assets | Fixed Assets | |
|---|---|---|
| Easily Converted to Cash | Yes | No |
| Useful Life | Less than 12 months | Longer than 12 months |
| Operating Assets | Yes | Yes |
| Tangible | Sometimes | Yes |
| Depreciable | Sometimes | Yes |
| Examples | Cash Accounts Receivable Inventory Prepaid Expenses |
Vehicles Machinery Equipment Land |
| Where disclosed on Balance Sheet | Under Current Assets | Under Noncurrent Assets |
| Potential Income Statement impact | Varied. E.g., uncontrolled accounts receivable hit as bad dept expense; Old inventory written off as obsolescence expense. | Related depreciation expense; or any gain/Loss on sale or other disposal. |
| Affected Statement of Cash Flow section | Operating Activity | Investing Activity |
| * except for land |
Fixed assets are the property, plant and equipment — with multiyear useful lives — that form the backbone of a business.
Important Points to Remember
- Fixed assets are physical, durable resources that a company uses to create goods and services.
- Since fixed assets usually have a high value, having more of them can increase a company’s value and access to funding.
- Capitalization and depreciation are accounting practices used to handle fixed assets, which offer benefits to a business and are reflected in financial reports and tax returns.
- Using fixed assets management software is the most accurate and efficient way to manage accounting for fixed assets.
Understanding Fixed Assets Examples in Business
Fixed assets refer to the machinery, equipment, and tools that a business needs to produce its products or services. These assets are classified as capital goods, which are used to generate income from business operations rather than being sold to customers. Unlike consumer goods, which are sold for customers’ use, fixed assets are considered integral to a company’s operations and are not intended for resale.
Since fixed assets tend to have a high value, having more of them can increase a company’s valuation and provide access to additional capital. Accounting treatments like capitalization and depreciation of fixed assets offer benefits to businesses and are reflected in financial statements and tax returns. To achieve accurate and efficient accounting for fixed assets, businesses can use fixed asset management software.
The Importance of Fixed Assets for Businesses
Fixed assets play a crucial role in helping businesses operate and generate revenue. They also contribute to a company’s net worth and can be used as collateral for loans. Here are some specific reasons why fixed assets are important:
- Support for business operations: Fixed assets are essential to most companies in generating revenue. They can be directly used to provide products or services, or to support administrative functions. For instance, vehicles, machinery, and computers are all types of fixed assets that can enhance a business’s ability to produce more.
- Increased company valuation: Fixed assets tend to be high-value items and are an important part of a company’s overall value. Businesses with more fixed assets may have a higher valuation, especially in asset-intensive industries like manufacturing where fixed assets make up a larger portion of total assets.
- Potential for driving growth: Fixed assets can be used as collateral for loans that companies can use to pursue new opportunities. Access to additional capital can help a business improve its cash flow, which can be critical for growth and expansion.
Examples Advantages of Fixed Assets
Fixed assets are not only important for a company’s balance sheet, but they also offer benefits that extend to other financial statements. The accounting treatments of fixed assets, particularly capitalization and depreciation, have implications for income statements, statements of cash flows, and tax returns. By recording fixed assets on the balance sheet and gradually reducing their value through depreciation, rather than expensing them all at once, companies can realize several benefits that are reflected in their financial statements. Here’s a breakdown of how fixed assets can benefit each type of financial statement:
Balance sheets and the Importance of Fixed Assets
Fixed assets are essential to a company’s financial health and are a key component of its balance sheet. Investors and other external parties look to the balance sheet to assess the value of a company, and fixed assets play a crucial role in this valuation.
Fixed assets are typically included in the noncurrent asset section of the balance sheet, and their value is net of accumulated depreciation. This depreciation reflects the ongoing reduction in value of the fixed asset as it ages.
On the balance sheet, PPE fixed assets are often separated from other noncurrent assets because they are a line item that is frequently analyzed by external investors and partners when evaluating a company. By understanding the value and depreciation of a company’s fixed assets, investors can gain insights into the company’s financial health and long-term growth prospects.
Examples Fixed Assets and their Importance in Business Financials
Fixed assets not only impact a company’s balance sheet, but also its income statement. The depreciation expenses related to fixed assets are reflected in the income statement, and there are various depreciation methods in accordance with GAAP. The objective is to allocate the cost of a fixed asset over the period of its usefulness. For instance, a forklift costing $100,000 and estimated to have a useful life of 10 years would be more accurately depicted on the income statement as a $10,000 annual expense, instead of a $100,000 expense in the year of purchase and $0 in each of the following nine years.
Reflection of Fixed-Asset Treatment Benefits in Statements of Cash Flows
The cash flow statement reflects fixed-asset treatment benefits in two ways. Firstly, the non-cash depreciation expense included in the net income on the income statement is reversed on the statement of cash flows. This allows for a focus only on cash expenses when analyzing liquidity. Secondly, all fixed asset activity is recorded in the “cash flows from investing activity” section to distinguish it from continuing operations. While fixed assets are critical to operations, their purchase and disposal are unique, nonrecurring transactions, and separating them from day-to-day operations aids in capturing the activity accurately.
Tax Benefits and Depreciation of Fixed Assets
Fixed assets have special tax benefits in the U.S. and globally, allowing companies to reduce their taxable income through depreciation. This enables a company to maximize its fixed asset deduction by spreading it out over multiple periods and offsetting revenue. The IRS uses accelerated depreciation methods to achieve this spreading effect over a shorter period than GAAP guidance recommends. It’s crucial to consult a tax adviser to be aware of all available benefits in specific tax jurisdictions.
However, land is an exception to this rule. While land is also capitalized on the balance sheet as a fixed asset, it does not depreciate and does not affect the income statement, statement of cash flows, or tax returns the same way as other fixed assets. This is because land does not decline in value due to use, exhaustion, or obsolescence like a piece of machinery.
Examples and Defining Characteristics of Fixed Assets
When classifying assets, fixed assets have several defining characteristics that set them apart from other asset types.
Purpose: Fixed assets are acquired for operational use in supporting the production of goods or services, rather than for resale. For instance, a construction company would buy a truck for use at job sites, not for resale. They are not incorporated into finished goods, unlike raw material assets. As an example, lumber cannot be a fixed asset for a construction company as it becomes part of the completed building.
Longevity: Fixed assets have a lifespan that is beneficial for more than one fiscal cycle, usually spanning multiple years. Their value is depreciated over the useful life of the asset according to the matching principle of accounting, instead of as a single expense in the period it was acquired. A warehouse is an example of a fixed asset that is expected to last for many years and is depreciated over time. However, land is an exception as it is not depreciated.
Tangibility: Fixed assets are substantial and tangible assets that exist physically. Examples include machinery and tools. Long-lived intangible assets such as patents are noncurrent assets but are not classified as fixed assets.
Accounting Treatment for Fixed Assets
Due to their long lifespan, accounting for fixed assets changes over their life cycle. Initially, fixed assets are capitalized upon acquisition and then systematically depreciated over their useful lives. While in operation, their value is periodically assessed and adjusted downwards for any impairment detected, based on comparison with market value or when unusual circumstances arise. Ultimately, the accounting processes relating to their disposal, retirement, or scrapping reflect these reevaluations, potentially resulting in a gain or loss on the fixed asset.
Fixed Assets and Financial Reporting
When a fixed asset is acquired, it is recorded on the balance sheet at its cost, including any additional costs incurred to make it ready for use, such as installation charges. Depreciation expenses are recognized in the income statement each period. An account called “accumulated depreciation,” a contra-asset account, is maintained on the balance sheet to accumulate periodic depreciation charges, representing the running balance of the fixed asset when combined with the asset account. This net value is compared periodically to market value, particularly if a significant event occurs with the fixed asset, such as a fire. Accountants reduce the value of fixed assets for impairment, but they do not increase it unless actual expenditures are made to increase the capitalized amount.
Examples Accounting for Fixed Assets and Depreciation
Fixed assets have a limited useful life, and their value decreases over time due to wear and tear, obsolescence, and other factors. Depreciation is the accounting process of allocating the cost of a fixed asset over its useful life. This means that each accounting period, a portion of the asset’s value is expensed, reducing the value of the asset on the balance sheet. The amount of depreciation expense recorded each period depends on several factors, such as the cost of the asset, its useful life, and the estimated salvage value at the end of its useful life.
There are different methods of calculating depreciation, including the straight-line method, the declining balance method, and the units of production method. The choice of depreciation method may vary depending on the nature of the asset and the purpose of the financial statement. It is essential to follow both GAAP and IRS guidelines when determining the length of an asset’s useful life and selecting the appropriate depreciation method.
Fixed Asset Examples: A Comprehensive List
Fixed assets are valuable, tangible items that are critical to business operations. They come in many forms, and can be inventoried individually or grouped by categories. Here are several examples of fixed assets, grouped by category:
- Land: Land that is owned by a business and used for operational purposes is considered a fixed asset. However, land held for speculation or resale is not.
- Buildings and factories: Buildings and factories, including offices, warehouses, workshops, and garages, are fixed assets.
- Furniture and fixtures: Desks, tables, and office equipment are considered fixed assets. Additionally, fixtures such as sinks, cubicle walls, and rugs are included if they cannot be removed without damaging the asset.
- Leasehold improvements: Any additions or upgrades made to leased or rented property, such as retail shelving or office walls, are considered fixed assets.
- Computer hardware, software, and office equipment: Computer hardware such as PCs, servers, and tablets are fixed assets. Additionally, software such as enterprise packages and cloud-based applications, and office equipment like copiers and telephones are also considered fixed assets.
- Vehicles: Cars, trucks, tractors, and forklifts are examples of fixed-asset vehicles.
- Machinery and equipment: Heavy machinery such as assembly lines, cranes, X-ray machines, and pizza ovens are all considered fixed assets.
- Tools: Higher-value tools that last more than a year are included in fixed assets, while lower-priced tools may be expensed. Companies typically set a “materiality threshold” for including tools in fixed assets.
By grouping fixed assets into these categories, companies can better manage and account for their valuable assets.
Improve Your Business Efficiency and Accuracy with NetSuite Fixed Assets Management
Fixed assets are an essential part of most businesses, as they help the company to generate revenue by producing products or services. However, managing fixed assets manually can be time-consuming and prone to errors. Using a software solution like NetSuite Fixed Assets Management can help to streamline the process and ensure that your company’s fixed assets are being accurately accounted for. With the software, you can maintain a complete inventory of all fixed assets, including their historical cost and depreciation schedule. This information helps to ensure the proper accounting for fixed assets and provides a safeguard for these valuable assets.
Fixed asset management software can help your team manage assets that are located in different locations, allowing for better organization and more efficient management. NetSuite Fixed Assets Management is cloud-based, making it accessible from anywhere, at any time. This means that your operations and accounting teams can access the software and manage fixed assets from wherever they are located.
Proper management of fixed assets is crucial for accurate financial statements and tax filings, as well as for valuing your company and securing collateralized loans. Investing in a reliable fixed asset management solution like NetSuite Fixed Assets Management can help your business improve efficiency and accuracy, while also providing peace of mind knowing that your fixed assets are being properly accounted for.
Common Questions About Fixed Assets and Examples
- What counts as a fixed asset? Fixed assets are tangible assets, like land, buildings, machinery, and vehicles, that have a useful life of more than one year and provide operational benefits.
- What are the different types of assets? Assets can be categorized based on their convertibility to cash, tangibility, and whether they are operating or nonoperating. Fixed assets are a type of tangible, operating asset that is not easily converted to cash.
- What are fixed assets and what are some examples? Fixed assets are long-lived, tangible assets used in business operations, such as buildings, furniture, and computers.
