Definition
Fixed assets are long-term, tangible properties that businesses use in their operations to generate income. Unlike inventory items, which are intended for resale, fixed assets are held for the purpose of producing goods or rendering services and are not expected to be converted into cash within a year. Common fixed assets include buildings, machinery, vehicles, furniture, and land.
Key Points:
- Fixed assets are recorded on the balance sheet as non-current assets.
- They are subject to depreciation, except for land.
- Fixed assets can influence both the capital structure and the operating capacity of a business.
- Disposal, impairment, or revaluation changes the book value of fixed assets.
Examples
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Buildings: These are structures used for business purposes, such as office buildings, warehouses, and manufacturing plants. A company like a retail chain may list its storefront properties as fixed assets.
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Machinery and Equipment: These include tools and machinery used in the production process. For instance, a car manufacturer will list facilities like assembly lines and welding machines.
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Furniture and Fixtures: Items such as desks, chairs, lighting, and shelving units fall under this category. For example, an office-based business will include its office furniture as fixed assets.
Frequently Asked Questions (FAQs)
What are fixed assets used for?
Fixed assets are used to produce goods or services, enhance the operational capabilities of a business, and generally remain in usage for multiple financial periods.
Can fixed assets be depreciated?
Yes, fixed assets, except for land, are depreciated over their useful life as per accounting standards. Depreciation expenses reduce the book value of these assets over time.
How are fixed assets different from current assets?
Fixed assets are long-term and not easily converted into cash, whereas current assets, like inventory and accounts receivable, are expected to be converted into cash within a year.
Can fixed assets lose their value?
Yes, fixed assets can lose value due to wear and tear, obsolescence, or other factors, and this loss is accounted for through depreciation. Impairment may also occur, necessitating a write-down of the asset’s book value.
How should businesses record disposal of fixed assets?
When disposed of, the asset’s book value (cost minus accumulated depreciation) is removed from the balance sheet, and any gain or loss on the disposal is recorded in the financial statements.
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Depreciation: The systematic allocation of the cost of a tangible asset over its useful life.
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Impairment: A reduction in the recoverable amount of a fixed asset below its book value.
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Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, or maintain fixed assets.
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Tangible Assets: Physical assets that can be touched, such as machinery, buildings, and vehicles.
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Intangible Assets: Non-physical assets with long-term value like patents, trademarks, and goodwill.
Online Resources
- Investopedia: Fixed Assets
- AccountingCoach: What are Fixed Assets?
References
- “Financial Accounting for Dummies” by Maire Loughran
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Suggested Books for Further Studies
- “Fixed Assets Management: Best Practices Series” by Jim Grabski.
- “Fixed Assets and Depreciation” by David Tolson.
- “Accounting for Fixed Assets” by Raymond H. Peterson.
Real Estate Basics: Fixed Assets Fundamentals Quiz
### What are fixed assets in a company's financial statement?
- [ ] Short-term assets used for immediate sale.
- [ ] Stocks and securities held for investment.
- [x] Tangible property used in business operations and not for sale.
- [ ] Liquid assets convertible to cash within a year.
> **Explanation:** Fixed assets are long-term, tangible properties used in a company's operations to create income and are not intended for sale.
### Which type of fixed asset is NOT depreciable?
- [x] Land
- [ ] Machinery
- [ ] Building
- [ ] Furniture
> **Explanation:** Land is considered a fixed asset but is not depreciable. Instead, it often appreciates over time, while other fixed assets like machinery and buildings are depreciable.
### How are fixed assets recorded on the balance sheet?
- [x] As non-current assets
- [ ] As current assets
- [ ] As liabilities
- [ ] As equity
> **Explanation:** Fixed assets are recorded as non-current (long-term) assets on the balance sheet, reflecting their lasting use in company operations.
### Why is depreciation applied to fixed assets?
- [ ] To increase their book value annually.
- [x] To systematically allocate their cost over useful life.
- [ ] To convert them into current assets.
- [ ] To signify a company's profitability.
> **Explanation:** Depreciation is applied to fixed assets to allocate the cost of the assets over their expected useful life, providing a more accurate reflection of profit in financial statements.
### How do fixed assets influence a company's financial statements?
- [ ] They only affect income statements upon sale.
- [ ] They don't influence the financial statements.
- [x] They impact the asset value and depreciation expense reported.
- [ ] They exclusively vary the company's equity.
> **Explanation:** Fixed assets affect the asset value and depreciation expenses reported in the financial statements, thus having implications on both balance sheets and income statements.
### Why might a business assess impairment on its fixed assets?
- [ ] To increase their market value.
- [x] To account for a significant, long-term drop in the asset's value.
- [ ] To avoid paying taxes.
- [ ] To extend the asset's useful life.
> **Explanation:** Impairment is assessed when there's a significant and unexpected drop in the value of a fixed asset, necessitating a write-down to reflect a reduced recoverable amount.
### What is capital expenditure (CapEx) in relation to fixed assets?
- [ ] Routine operational expenses.
- [x] Funds used for acquiring or maintaining fixed assets.
- [ ] Payment of financial liabilities.
- [ ] Day-to-day business expenses.
> **Explanation:** Capital expenditure (CapEx) refers to costs incurred by a company to acquire, upgrade, or maintain fixed assets.
### Which statement is correct regarding tangible and intangible assets?
- [x] Tangible assets are physical and can be touched, while intangible assets cannot.
- [ ] Both tangible and intangible assets are always liquid.
- [ ] Intangible assets include items like furniture and vehicles.
- [ ] Tangible assets include licenses and patents.
> **Explanation:** Tangible assets are physical items like machinery and buildings, while intangible assets exist in non-physical forms such as patents and trademarks.
### When compared to current assets, how are fixed assets different?
- [ ] Fixed assets are more liquid.
- [ ] Fixed assets are converted into cash within a year.
- [x] Fixed assets are long-term and not easily converted into cash.
- [ ] Fixed assets are lesser in value compared to current assets.
> **Explanation:** Fixed assets are long-term and are not intended to be converted into cash within a year, unlike current assets which are short-term and more liquid.
### How should businesses handle the disposal of fixed assets?
- [ ] Remove them from the balance sheet without any record.
- [x] Record any gain or loss on disposal and remove from the balance sheet.
- [ ] Convert them into current assets.
- [ ] Transfer them directly into goodwill.
> **Explanation:** Businesses should remove the asset's book value from the balance sheet and record any gain or loss from the disposal in their financial records.
