Fixed assets are long-term, tangible, or intangible assets that a business owns and uses to generate revenue over time. Examples of fixed assets include buildings, machinery, vehicles, furniture, trademarks, etc.
Unlike current assets (such as cash and accounts receivable), fixed assets are not intended for immediate sale or conversion into cash, they are rather used in the production of goods and services.
Characteristics of Fixed Assets
Several key characteristics are specific to fixed assets:
- Long-term use: Fixed assets are designed for long-term use in a business operation, typically lasting more than one year.
- Productive capacity: Fixed assets are utilized to generate revenue or support business operations.
- Tangibility: Most fixed assets are physical things that can be touched, seen, and felt. However, there are some long-term assets, such as intellectual properties, which are not so obviously tangible.
- Non-liquid: Fixed assets are non-liquid because they are intended for long-term use.
- High value: Fixed assets typically have a higher monetary value compared to other company assets.
- Depreciation: As their value reduces over time, fixed assets are subject to depreciation.
Assets vs Fixed Assets
While all fixed assets are assets, not all assets are fixed assets. The term “assets” refers to anything owned by a company that has value and can be used to generate future economic benefits, which includes both fixed and current assets (such as cash, inventory, and accounts receivable). In simple terms, assets are a broader category than fixed assets.
Fixed Assets vs Current Assets
Fixed assets and current assets serve different purposes in a company’s operations. The key difference between the two is that fixed assets are intended for long-term use, with an expected life of more than one year, whereas current assets are intended for short-term use or sale. Fixed assets are necessary for the long-term production of goods and services, while current assets can be quickly converted into cash and used to finance day-to-day operations or pay off debts or other short-term obligations.
In terms of financial reporting, fixed assets and current assets are listed separately on the balance sheet. Current assets are listed first, followed by fixed assets. The total value of current assets is subtracted from current liabilities to determine a company’s working capital. Fixed assets are reported at their historical cost less accumulated depreciation.
Why are Fixed Assets Important?
Since fixed assets are typically of higher value, they represent a significant investment for businesses and can impact a company’s profitability in several ways:
- Productivity: Fixed assets are critical for producing goods and services, thus directly impacting a company’s productivity and efficiency.
- Value: Fixed assets can increase a company’s overall value, which is important when seeking investors or obtaining loans.
- Tax deductions: Fixed assets are subject to depreciation, which can provide tax deductions for businesses.
- Resale value: Although fixed assets are not intended for immediate sale, they can be sold in the future, providing a potential source of revenue for businesses.
Fixed Assets and Depreciation
As mentioned earlier, fixed assets are subject to depreciation, which reduces their value over time. Depreciation is an accounting method that reflects the decline in the value of a fixed asset as it ages. This decline in value is recognized over the useful life of the asset through periodic charges to income (as a non-cash expense). Common methods of depreciation include straight-line depreciation, declining balance depreciation, and units of production depreciation.
Fixed Assets and Financial Statements
Fixed assets are an essential component of a company’s financial statements. A balance sheet will typically list its fixed assets along with their current value (after depreciation). Fixed assets also impact a company’s income statement by increasing expenses through depreciation charges.