A Complete Guide to Fixed Assets (Including Examples)
Updated July 21, 2022
The speed that a company can convert an asset into cash determines how they categorize it in their financial records, specifically whether it's a current or non-current asset. Fixed assets are effective investments by the company that help it generate income. Understanding what this class of asset is and how to treat it in financial records is essential for those considering a career in accounting or finance.
In this article, we define the asset class, explain the difference between this type of asset and other asset classes, discuss how to record these assets in financial records, and provide several examples of this type of asset.
What are fixed assets?
Fixed assets are long-term assets purchased by a company to be used in its production process. This means the company plans to retain the asset longer than its current financial reporting period, using it to assist in achieving its long-term strategic plans. Generally, these assets are tangible, which means they're physical assets.
A business is not usually able to liquefy or convert this class of asset into cash quickly. The asset is important to a company because it's used to produce goods or services which the company then sells, meaning, a company rarely sells these assets unless it's for strategical reasons.
Related: How to Calculate Net Income
How to record these assets in financial reporting
A company records this asset class on its balance sheet to enable a complete financial overview of its position to be determined. Follow these steps to learn how to record a fixed asset:
1. Review of previous financial records
When preparing the balance sheet and other financial reports for an organization at the end of the financial year, it's important to review the previous year's balance sheets. This helps to identify all the assets of this nature owned by the company at that time. It also ensures they're all accounted for, which is especially important, as assets come to the end of their lifespan. One of the best ways of doing this is by keeping a running log of the asset class. This has become easier with accounting software, with many products doing this automatically.
2. List newly acquired assets of this nature
If the company has acquired any non-liquid assets over the previous year, then they record them on the balance sheet. A business records most of these assets as property, plant, or equipment. At the end of this article, there are examples of each class of asset.
Over time, the company subtracts depreciation from the value of the asset to reflect its usage and expected life. Depreciation is a fixed percentage of the value of the asset. The calculation reflects how an asset's value diminishes over time. This spreads the cost over the asset's lifetime, although it doesn't reflect the fair market value of the asset.
3. Account for previously disposed assets in this class
The company includes any assets in this class that they've sold or otherwise disposed of in the balance sheet. This means that if, for example, the company has sold the asset, then it's necessary to include the proceeds of the sale on the balance sheet. Subtracting the book or depreciated value from the sale price allows the company to determine if the transaction resulted in a gain or loss.
The journal entry required to account for the sale of this type of asset is slightly complex. Fortunately, most computer accounting packages complete the necessary journal entries automatically. If you're completing this process manually, it generally requires the following:
debit the cash from the sale
debit the accumulated depreciation
credit the fixed asset account with the sale price
credit any loss or debit any gain
Difference between this asset class and other assets
Fixed assets are a special class of assets. There are some key differences between them and other types of assets, including:
Comparison to current assets
Current assets are assets that the company expects to either consume, use in their entirety, or sell over the next financial year. This occurs in the course of the company's normal business operation. They typically include cash, cash equivalents, accounts receivables, stock inventory, pre-paid liabilities, and other liquid assets. One reason current assets are important to a business is it can sell them to cover operating costs or to fund day-to-day business operations. Assets that are fixed have a very different role within an organization. They assist in producing goods and services.
Office supplies are one asset that has traditionally caused some issues regarding whether they're a current asset and how to best record them in the company's financial reports. One way to account for office supplies is to track them as a current asset and then expense them against the relevant costs when an employee uses them. This approach works well when the office supplies have been bulk purchased.
Comparison to intangible assets
A tangible asset is a physical asset. Assets that are fixed fall under this definition. An intangible asset is the opposite. It's an asset that has long-term financial value for the company but doesn't have a physical presence. Intangible assets include intellectual property rights, such as trademarks, patents, and copyrights. They also include software and other computer-related assets that are not hardware. Intangible assets have the potential to generate income for the organization, over time. Like a fixed asset, the company assesses this period as longer than one year.
Many intangible assets are not visible, but still make a notable contribution to the company. The value of some intangible assets can be a sizeable amount on the balance sheet. Brand recognition, for example, improves the company's reach and increases sales, giving it value. The value a company assigns an intangible asset reflects its importance and contribution to the organization. Goodwill is another asset that often features in the intangible asset's column of financial reports.
Setting a capitalization threshold
When a company is setting a capitalization threshold, it's as a result of an internal policy decision. Once the company decides the threshold, it's vital that it's recorded in writing to ensure it meets the necessary audit standards. When working out the cost of these assets to determine if they meet the capitalization threshold, it's best practice to include the cost of setting it up as part of the asset's cost.
Examples of fixed assets
These assets are physical assets that a company has brought over time. They include:
There are several types of building that a business might purchase. Generally, the buildings reflect the type of operation the company is running. Buildings that are typically considered this type of asset include:
It's important to note that when a company records buildings on its balance sheet, the value doesn't include the land where buildings are located. This is because businesses account for land differently in their business accounts. While buildings depreciate over time, the value of the land doesn't. The company records land elsewhere on the balance sheet, but still as this type of asset.
A business records furnishings as this type of asset when they're higher than the capitalization threshold. Furnishings include everything that's used in the course of business in an office. This includes desks, chairs, tables, and shelves. It also includes things like the office refrigerator, microwave, and washing machine.
The vehicles that an organization owns are assets of this nature as long as the organization is retaining them longer than a year. This category encompasses all vehicle types, including cars, boats, ships, airplanes, trucks, and trailers. If the company has a fleet of cars that are available to employees to use, they will treat them as this type of asset.
Businesses always record computer hardware as an asset that is fixed. Like furnishings, it is often subject to a capitalization threshold. Computer hardware includes computers, screens, printers, computer desks, and other similar products. Companies do not consider software as an asset of this nature.
Machinery covers anything that's used by employees in the course of their work. It also includes the items and tools that are used in the production of goods or services. Machinery includes 3D printers, specialist manufacturing tools, and transport machinery.
Land is the only asset in this class that does not depreciate over time. A company records buildings, any improvements, such as lighting, sidewalks, and fencing separately in the financial reports. They're also likely to be subject to a relevant capitalization threshold.
Explore more articles
- How to Write a Keep-in-Touch E-Mail (With Template)
- What Are Functional Areas of Business? (Including Types)
- Our Guide to Business Casual for Men
- Everything You Need to Know About Work Samples (With Tips)
- What Are Project Management Milestones? (With Types)
- 10 Top Security Certifications for IT Professionals
- How To Prepare an Employee Write-up (With Form and Example)
- Differences between Accounts Receivable vs. Accounts Payable
- What Is an Organizational Objective? (A Complete Guide)
- What Are Tangible Goods? (With Classifications and Benefits)
- 11 Examples of Strategic Leadership (With Relevant Skills)
- Why Collaboration Is Important in the Workplace (With Tips)