The term fixed asset refers to a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. These assets are expected to last more than one year, be consumed over time, or be converted into cash eventually.
As companies use these assets in their day-to-day operations, the value of the assets depreciates due to natural wear and tear. The most common fixed assets appear on the balance sheet as property, plant, and equipment (PP&E).
Key Takeaways:
- Fixed assets are items that a company plans to use over the long term to help generate income.
- Fixed assets are most commonly referred to as property, plant, and equipment.
- Current assets are any assets intended to be converted to cash or used within a year.
- Noncurrent assets, in addition to fixed assets, include intangibles and long-term investments.
- Fixed assets are subject to depreciation to account for the loss in value, whereas intangibles are amortized.
Understanding Fixed Assets in Corporate Accounting
A company’s balance sheet statement includes its assets, liabilities, and shareholder equity. Assets are divided into current assets and noncurrent assets, based on their useful lives. Current assets are typically liquid and can be converted into cash in less than a year. Noncurrent assets are not easily converted to cash and include long-term investments, deferred charges, intangible assets, and fixed assets.
Fixed assets typically have a physical form and are reported as PP&E on the balance sheet. Corporations purchase fixed assets for production, rental to third parties, or organizational use.
Fixed Assets and Depreciation
Fixed assets lose value as they age. Given their long-term benefits, these assets are expensed differently. Tangible assets are subject to periodic depreciation while intangible assets are amortized. This matches the asset’s cost with its long-term value, reflecting decreasing asset value on the company’s balance sheet.
Impact on Financial Statements
The acquisition or disposal of a fixed asset is recorded on a company’s cash flow statement under cash flow from investing activities. Purchases represent a cash outflow, while sales are a cash inflow. When an asset’s value falls too much, it might be subject to an impairment write-down, adjusting its recorded value to reflect overvaluation.
When a fixed asset no longer provides value, it is typically sold for salvage value or disposed of and written off from the balance sheet.
Fixed Assets vs. Current Assets and Noncurrent Assets
Both current and fixed assets appear on the balance sheet. Current assets are used or converted to cash within one year, while fixed assets are for long-term use and subject to depreciation. Noncurrent assets also include long-term investments and intangible assets like goodwill and trademarks.
Benefits of Fixed Assets
Fixed assets are crucial for financial reporting, business valuations, and comprehensive financial analysis. These reports help investors and creditors evaluate a company’s financial health. A business’s effective recording, depreciating, and disposing prac¬tices require detailed scrutiny of financial statement notes.
Capital-intensive industries, including manufacturing, heavily rely on accurate fixed asset reporting to understand their financial state and predict growth trends.
Examples of Fixed Assets
Fixed assets may include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For instance, if a produce company uses delivery trucks for its operations, those trucks are fixed assets. Conversely, personal items or consumables like rock salt for melting parking lot ice are considered expenses, not fixed assets.
Common Questions
What Is the Difference Between Fixed Assets and Current Assets?
Fixed assets are depreciated and long-term, whereas current assets are used or converted to cash within a year and are not depreciated. Both types appear on the balance sheet but serve different operational purposes.
Examples of Fixed Assets?
Fixed assets might include buildings, computers, software, machinery, and vehicles. They are instrumental in business operations and help in income generation over time.
Other Types of Noncurrent Assets?
Aside from fixed assets, noncurrent assets can include long-term investments and intangibles like goodwill, copyrights, trademarks, and intellectual property.
Is a Car a Fixed Asset?
It depends on use. A car used for business operations is considered a fixed asset, while personal-use vehicles are not recorded on the balance sheet.
Is a Laptop a Fixed Asset?
If used for business to generate income, a laptop is considered a fixed asset and is recorded on the company’s balance sheet.
The Bottom Line
A fixed asset is long-term tangible property or equipment vital for a company’s operational income generation. These assets, appearing as PP&E on the balance sheet, are depreciated due to their reduced value over time. They are contrasted with current assets which turn into cash in less than a year and aren’t subject to depreciation.
Related Terms: current assets, noncurrent assets, book value, market value.
References
- Internal Revenue Service. “Instructions for Form 4562 (2021)”.
- Jacek Welc. Reading Between the Lines of Corporate Financial Reports: In Search of Financial Misstatements, Pages 189 and 247-248. Springer Nature, 2020.
- Board of Governors of the Federal Reserve System. “Financial Accounting Manual for Federal Reserve Banks January 2022”, Page 78.
