Fixed Asset in Accounting: Definition, Examples, and Key Considerations

Explore the definition of fixed assets in accounting, including examples and key considerations for their management and valuation.

A fixed asset is a long-term tangible asset that a firm owns and uses to produce income and is not expected to be sold or consumed within a year. Known also as property, plant, and equipment (PP&E), these assets are integral to a company’s operations.

Types of Fixed Assets

Land

Land is the only fixed asset that is not depreciated because it generally does not lose its value over time.

Buildings

Structures such as office buildings, warehouses, and factories used in the operations of the business.

Machinery and Equipment

Includes industrial machines, computers, and other operational machinery essential for the production processes.

Vehicles

Transportation assets that a company uses for business purposes, such as company cars, trucks, and delivery vans.

Furniture and Fixtures

Includes office furniture, light fixtures, and other non-movable furnishings used in day-to-day operations.

Special Considerations

Depreciation

Fixed assets, except for land, are subject to depreciation, a systematic allocation of the cost of an asset over its useful life.

Capitalization

Expenditures incurred to acquire fixed assets are capitalized (recorded as an asset on the balance sheet) and not expensed immediately.

Impairment

Fixed assets are periodically reviewed for impairment, which occurs when the market value of an asset drops below its book value.

Asset Disposal

The process of selling, retiring, or otherwise disposing of fixed assets once they are no longer useful to the business operations.

Examples of Fixed Assets

• Land and Buildings: Real estate property owned by the business.
• Machinery: Manufacturing equipment for production.
• Vehicles: Fleet of cars used for business logistics.
• Computers: IT infrastructure for company operations.

Historical Context

The concept of fixed assets dates back to the early days of commerce when businesses recognized the importance of long-term resource investment to sustain operations. With the Industrial Revolution, the term expanded to include a broader range of tangible assets, reflecting the growing complexity of business operations.

Applicability in Modern Business

Fixed assets play a critical role in modern business by providing the necessary infrastructure to operate. Effective management, including regular maintenance and accurate depreciation calculations, ensures the longevity and efficiency of these assets.

Related Terms

• Current Asset: Short-term assets expected to be converted to cash within a year.
• Depreciation: The reduction in the value of an asset over time.
• Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, or maintain fixed assets.
• Book Value: The value of an asset as it appears on the balance sheet, at cost minus accumulated depreciation.

FAQs

How are fixed assets different from current assets?

Fixed assets are long-term assets not expected to be converted to cash within a year, whereas current assets are short-term and expected to be converted to cash within a year.

Why is depreciation important for fixed assets?

Depreciation allocates the cost of a fixed asset over its useful life and helps in accurately reflecting the wear and tear on the asset, affecting financial statements.

Can a fixed asset be revalued?

Yes, companies can revalue fixed assets to reflect their current market value, although practices and regulations for revaluation vary by country and accounting standards.

References

1. International Financial Reporting Standards (IFRS)
2. Generally Accepted Accounting Principles (GAAP)
3. “Principles of Accounting,” by Belverd E. Needles, Jr.
4. Financial Accounting Standards Board (FASB) publications

Summary

Fixed assets are crucial resources for any business, providing the necessary infrastructure to conduct operations and generate income. Understanding their classification, management, and the principles of depreciation and impairment is essential for accurate financial reporting and efficient business operations. Careful consideration of these factors ensures that companies can maximize the utility and value derived from their fixed assets.