Fixed assets

Fixed assets are long-term tangible property that a company owns and uses in its operations to generate income and are not expected to be consumed or converted into cash within a year.
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Updated on Jun 14, 2024
Reading time 5 minutes

3 key takeaways

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  • Fixed assets are long-term investments used by a company to produce goods or services and are essential for its operations.
  • These assets include property, plant, equipment, and machinery, and they are recorded on the balance sheet at their purchase cost minus depreciation.
  • Proper management and maintenance of fixed assets are crucial for ensuring their longevity and efficiency in business operations.

What are fixed assets?

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Fixed assets, also known as capital assets or property, plant, and equipment (PP&E), are tangible items that a company owns and uses in its operations over a long period. These assets are vital for producing goods or services and are not intended for resale in the ordinary course of business. Fixed assets are recorded on the company’s balance sheet and are subject to depreciation over their useful life.

Examples of fixed assets

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Land: Land owned by a company for operational purposes, such as factory sites or office locations, is considered a fixed asset. Unlike other fixed assets, land is not depreciated.

Buildings: Structures owned by a company, including factories, warehouses, and office buildings, are fixed assets that provide space for operations.

Machinery and equipment: This category includes heavy machinery, manufacturing equipment, and tools that are essential for production processes.

Vehicles: Company-owned vehicles used for business purposes, such as delivery trucks and company cars, are fixed assets.

Furniture and fixtures: Office furniture, shelving, and other fixtures that support business operations are also considered fixed assets.

Importance of fixed assets

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Operational efficiency: Fixed assets are crucial for a company’s day-to-day operations. They enable the production of goods and services, support administrative functions, and facilitate the overall business process.

Long-term investment: Fixed assets represent significant long-term investments. Proper acquisition, management, and maintenance of these assets are essential for sustaining business growth and operational efficiency.

Financial stability: Fixed assets are part of a company’s tangible assets and contribute to its overall financial stability and creditworthiness. They can be used as collateral for securing loans and other financing options.

Accounting for fixed assets

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Initial recognition: Fixed assets are initially recorded on the balance sheet at their purchase cost, which includes the purchase price, transportation costs, installation fees, and any other costs necessary to bring the asset to its intended use.

Depreciation: Over time, fixed assets (except land) depreciate due to wear and tear, usage, and obsolescence. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Common depreciation methods include straight-line depreciation, declining balance depreciation, and units of production depreciation.

Impairment: Fixed assets are periodically reviewed for impairment, which occurs when the carrying amount of an asset exceeds its recoverable amount. If an asset is impaired, its carrying amount is reduced to its recoverable amount, and an impairment loss is recognized in the financial statements.

Disposal: When a fixed asset is sold, retired, or otherwise disposed of, it is removed from the balance sheet. Any gain or loss from the disposal is recognized in the income statement.

Management of fixed assets

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Maintenance and repairs: Regular maintenance and repairs are essential for ensuring the longevity and efficiency of fixed assets. Proper upkeep can extend the useful life of assets and prevent costly breakdowns.

Asset tracking: Keeping accurate records of fixed assets, including their location, condition, and maintenance history, is crucial for effective management. Asset tracking systems and software can help streamline this process.

Upgrades and replacements: Periodically evaluating fixed assets for potential upgrades or replacements is important for maintaining operational efficiency. Outdated or inefficient assets should be replaced with newer, more productive ones.

Depreciation planning: Understanding and planning for the depreciation of fixed assets helps companies manage their financial statements and tax liabilities effectively.

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To further understand the concept and implications of fixed assets, consider exploring these related topics:

  • Depreciation Methods: Different methods for allocating the cost of fixed assets over their useful life.
  • Asset Management: Strategies and tools for managing a company’s fixed and intangible assets.
  • Balance Sheet: Understanding how fixed assets are recorded and reported on a company’s balance sheet.
  • Capital Expenditures (CapEx): Expenditures incurred by a company to acquire or upgrade fixed assets.

Fixed assets are essential components of a company’s long-term investments and operational capabilities. Proper management and accounting for these assets are crucial for sustaining business efficiency and financial stability. Exploring these related topics can provide a deeper understanding of the importance and management of fixed assets in business operations.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...