What are fixed assets (fixed assets)?
Fixed assets refer to long-term tangible assets used in business operations. This type of asset provides long-term financial gains, has a useful life of more than one year, and is classified as property, plant and equipment (PP&E) on the balance sheet. In this article, you will know everything related to fixed assets, types of fixed assets and their characteristics.
The main characteristics of a fixed asset
The major characteristics of a fixed asset are given below:
1. Have a useful life of more than a year: Fixed assets are non-current assets that have a useful life of more than a year and appear on a company’s balance sheet as property, plant and equipment (PP&E).
2. Depreciable: With the exception of land, fixed assets are subject to depreciation to reflect the wear and tear caused by the use of the fixed asset.
3. They are used in business operations and provide long-term financial gain: the firm uses fixed assets to produce goods and services and generate revenue. It is not sold to clients or held for investment purposes.
4. They are illiquid: Fixed assets are a non-current asset on a company’s balance sheet that cannot be easily converted into cash.
The importance of fixed assets
Fixed assets are essential for any company. Apart from being used to help a business generate revenue, it is looked at closely by investors when deciding whether to invest in a company. For example, the fixed assets turnover ratio is used to determine the efficiency of fixed assets in generating sales.
Companies that use their fixed assets more efficiently have a competitive advantage over their competitors. Understanding what is a fixed asset and what is not is of great importance to investors, as it affects the company’s valuation.
Fixed assets are fixed in nature and cannot be easily converted into cash. Below is the list of fixed assets, here are examples of fixed assets.
Examples of fixed assets
Fixed assets are fixed in nature and cannot be easily converted into cash. Below is the list of fixed assets, here are examples of fixed assets.
- Cash and cash equivalents
- Inventory
- investments
- Personal protective equipment (property, plant and equipment)
- Land
- buildings
- vehicles
- Home furniture
- Patents
- stock
- equipment
Although the above list includes examples of fixed assets, it is not necessarily general to all businesses. In other words, what is a fixed asset of a company cannot be considered as a fixed asset of another company.
For example, a delivery company might classify the vehicles it owns as fixed assets. However, the company that makes the vehicles classifies the same vehicles as stock. Therefore, consider the nature of the company’s business when determining fixed assets.
Types of fixed assets
We can classify the types of fixed assets into two main types: tangible and intangible assets. Let’s take a look at these two in detail.
concrete property
These objects include, for example, buildings, land, various appliances and equipment, vehicles, furniture, and much more. Think of your tangible resources as things you need to sustain your business. To value it, you need to start with what you acquired or rented it for and after that apply appropriate depreciation strategies to reduce its value.
Some fixed assets, for example, land or structures, may rise in value and not depreciate in the long run. You need to consider this factor also in your balance sheet.
Intangible assets
These can include goodwill, licenses, registered names or trademarks, even phone numbers, any innovation, and websites if you plan to sell. For assets such as phone numbers and trademarked or patented objects, the value is somewhat difficult to determine.
Goodwill is an elusive resource, and this type of asset is easier to calculate by finding the difference between the actual cost of the business and the cost at which it is bought or sold. Most other intangible resources are difficult to estimate.
The difference between fixed assets and current assets
Both current assets and fixed assets appear on the balance sheet, with current assets that are meant to be used or converted into cash in the short term (less than one year) and fixed assets that are meant to be used in the long term (more than one year).
Current assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses. Fixed assets are depreciated, while current assets are not.
The difference between fixed assets and non-current assets
Fixed assets are non-current assets. Other non-current assets include long-term investments and intangible assets. Intangible assets are fixed assets that are used in the long term, but which lack physical existence.
Examples of intangible assets include goodwill, copyrights, trademarks, and intellectual property. Meanwhile, long-term investments can include bond investments that will not be sold or mature within a year.
Fixed asset interest
Information about a company’s assets helps create accurate financial reports, business valuations, and a comprehensive financial analysis. Investors and creditors use these reports to determine the company’s financial health and decide whether to buy shares in the company or to lend it money.
Because a company may use a range of accepted methods for recording, depreciating, and disposing of its assets, analysts need to study the notes on the company’s financial statements to learn how to determine the numbers.
Fixed assets are especially important for capital-intensive industries, such as manufacturing, while they require large investments in construction machinery and equipment. When a company is consistently reporting negative net cash flows for the purchase of fixed assets, this can be a strong indication that the company is in growth or investment mode.
Fixed assets leasing
Keep in mind that not all fixed assets are purchased by a company. Most companies use both buying and leasing to acquire fixed assets. Under current accounting rules, assets under capital leases are capitalized by the lessee.
The depreciable lives of assets under capital leases generally represent the useful life of the asset (for leases with title transfer to the lessee at the end of the lease) or the relevant lease term (for all other capital leases).
Real estate leases are generally classified as operating leases by the lessee; Thus, lease facilities are not capitalized by the lessee. However, improvements made to the property—called leasehold improvements—must be capitalized when purchased by the tenant.
The depreciation period for leasehold improvements is shorter than the useful life of the lease improvement or lease term (including renewal periods that are reasonably certain to occur).
What you should do
- Consider all costs at the time of purchase or construction.
- Adopting a capitalization policy
- Estimating the useful life of depreciation based on the estimated operating life of the asset.
- Consider if the asset will have value at the end of its useful life, then base depreciation on cost, less estimated salvage value.
- Continuous reassessment of useful life estimates.
- Keep your depreciation records in sufficient detail so that assets can be accurately tracked when they are physically transferred and/or disposed of.
- Consider depreciation of assets when significant events or changes in circumstances occur.
- Be aware of upcoming changes with new rental accounting standards.
What you should avoid
- Expenses such as sales tax or freight costs incurred on the purchase of fixed assets.
- Use the depreciable ages based on the Internal Revenue Service rules for financial reporting purposes.
- ignore changes in the use of the asset or service; You may need to consider a depreciation of assets.
- Automatic depreciation of the leased asset over its useful life; Consider rent accounting to determine the right life.
- We forget to take into account the insurance record keeping requirements when recording and tracking fixed assets.
Although many entrepreneurs have a vague idea of ​​the value of their companies, most speculate – and after some time, that uncertainty can be costly. Thus, it is useful to know the total assets held by your business.
It is highly recommended to take advice from your accountant while calculating the value of fixed assets.
Please feel free to share your feedback or queries in the comments section below.
Frequently asked questions about fixed assets
Let’s take a look at some common questions that many business owners have..
Is the cost of buildings, machinery and land a fixed cost?
Yes, it is considered a fixed cost.
Are insurance premiums a fixed cost?
The cost of enterprise property insurance premiums is likely to be a fixed cost.
What are property, plant and equipment?
Appliances, vehicles, furniture, land and structure are used as part of the works.
What are fixed and concurrent assets and how do they differ from each other?
A non-current asset contains fixed assets. They are usually used in the balance sheet to report the property as property, plant and equipment.
What is the current ratio?
It is a financial ratio that shows the current resource range of current liabilities.
Is a money market account a fixed asset or a trading asset?
It is a current asset unless restricted for a long term reason. It is mostly considered as a short term asset of any organisation.