What are fixed assets in accounting

Long-term tangible assets that are used in the operations of a business

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Key Characteristics of a Fixed Asset
Importance of Fixed Assets
Examples of Fixed Assets
Relevance to Financial Statements
Additional Resources
Initial Asset Recordation
Asset Depreciation
Asset Impairment
Examples of Fixed Assets
Accounting for Fixed Assets
Is Inventory a Fixed Asset?
Terms Similar to Fixed Asset

Fixed assets refer to long-term tangible assets that are used in the operations of a business. They provide long-term financial benefits, have a useful life of more than one year, and are classified as property, plant, and equipment (PP&E) on the balance sheet.

Key Characteristics of a Fixed Asset

The key characteristics of a fixed asset are listed below:

1. They have a useful life of more than one year

Fixed assets are non-current assets that have a useful life of more than one year and appear on a company’s balance sheet as property, plant, and equipment (PP&E).

2. They can be depreciated

With the exception of land, fixed assets are depreciated to reflect the wear and tear of using the fixed asset.

3. They are used in business operations and provide a long-term financial benefit

Fixed assets are used by the company to produce goods and services and generate revenue. They are not sold to customers or held for investment purposes.

4. They are illiquid

Fixed assets are non-current assets on a company’s balance sheet and cannot be easily converted into cash.

Importance of Fixed Assets

Fixed assets are crucial to any company. Apart from being used to help a business generate revenue, they are closely looked at by investors when deciding whether to invest in a company. For example, the fixed asset turnover ratio is used to determine the efficiency of fixed assets in generating sales.

Companies that more efficiently use their fixed assets enjoy a competitive advantage over their competitors. An understanding of what is and isn’t a fixed asset is of great importance to investors, as it impacts the evaluation of a company.

Examples of Fixed Assets

Land
Machinery
Buildings and facilities
Vehicles (company cars, trucks, forklifts, etc.)
Furniture
Computer equipment
Tools

Although the list above consists of examples of fixed assets, they aren’t necessarily universal to all companies. In other words, what is a fixed asset to one company may not be considered a fixed asset to another.

For example, a delivery company would classify the vehicles it owns as fixed assets. However, a company that manufactures vehicles would classify the same vehicles as inventory. Therefore, consider the nature of a company’s business when classifying fixed assets.

Relevance to Financial Statements

A fixed asset has certain implications on a company’s financial statements:

Balance Sheet

A fixed asset is capitalized. When a company purchases a fixed asset, they record the cost as an asset on the balance sheet instead of expensing it onto the income statement. Due to the nature of fixed assets being used in the company’s operations to generate revenue, the fixed asset is initially capitalized on the balance sheet and then gradually depreciated over its useful life. A fixed asset shows up as property, plant, and equipment (a non-current asset) on a company’s balance sheet.

For example, a company that purchases a printer for $1,000 would record an asset on its balance sheet for $1,000. Over its useful life, the printer would gradually decapitalize itself from the balance sheet.

Income Statement

With the exception of land, fixed assets are depreciated. This is to reflect the wear and tear from using the fixed asset in the company’s operations. Depreciation shows up on the income statement and reduces the company’s net income.

For example, a company that purchases a printer for $1,000 with a useful life of 10 years and a $0 residual value would record a depreciation of $100 on its income statement annually.

Statement of Cash Flow

When a company purchases or sells a fixed asset with cash, that is reflected in the investing activities section of the cash flow statement. Purchases of fixed assets are an outflow of cash and are categorized as “capital expenditures,” while the sale of fixed assets is an inflow of cash and is categorized as “proceeds from the sale of property and equipment.”

For example, a company that purchases a printer for $1,000 using cash would report capital expenditures of $1,000 on its cash flow statement.

Additional Resources

Thank you for reading CFI’s guide to Fixed Assets. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

March 29, 2022 March 29, 2022/ Steven Bragg

A fixed asset is an item having a useful life that spans multiple reporting periods, and whose cost exceeds a certain minimum limit (called the capitalization limit). There are several accounting transactions to record for fixed assets, which are noted below. Some of these transactions will need to be repeated several times over the useful life of an asset.

Initial Asset Recordation

On the assumption that the asset was purchased on credit, the initial entry is a credit to accounts payable and a debit to the applicable fixed asset account for the cost of the asset. The cost of an asset can include any associated freight charges, sales taxes, installation fees, testing fees, and so forth. There may be a number of fixed asset accounts, such as Buildings, Furniture and Fixtures, Land, Machinery and Equipment, Office Equipment, and Vehicles.

Asset Depreciation

The amount of this asset is gradually reduced over time with ongoing depreciation entries. There are several variations on the depreciation calculation, but the most common approach is the straight-line method, where the estimated salvage value is subtracted from the cost, and the remaining amount is divided by the number of remaining months in the useful life of the asset. This yields a monthly depreciation charge, for which the entry is a debit to depreciation expense and a credit to accumulated depreciation. There are also several accelerated depreciation methods that recognize more of the depreciation early in the life of an asset. The balance in the accumulated depreciation account is paired with the amount in the fixed asset account, resulting in a reduced asset balance.

At the end of a fixed asset's useful life, it is sold off or scrapped. The entry is to debit the accumulated depreciation account for the amount of all depreciation charges to date and credit the fixed asset account to flush out the balance associated with that asset. If the asset was sold, then also debit the cash account for the amount of cash received. Any residual amount needed to balance this entry is then recorded as a gain or loss on sale of the asset.

Asset Impairment

The accountant should periodically test all major fixed assets for impairment. Impairment is present when an asset’s carrying amount is greater than its undiscounted future cash flows. When this is the case, record a loss in the amount of the difference, which reduces the carrying amount of the asset. If there is still some carrying value left, then this amount will still need to be depreciated, though probably at a much lower monthly rate than had previously been the case. Asset impairments are less likely towards the end of an asset’s useful life, because ongoing depreciation has reduced its carrying amount to a great extent.

March 29, 2022/ Steven Bragg/

May 14, 2022 May 14, 2022/ Steven Bragg

A fixed asset is property with a useful life greater than one reporting period, and which exceeds an entity's minimum capitalization limit. A fixed asset is not purchased with the intent of immediate resale, but rather for productive use within the entity. Also, it is not expected to be fully consumed within one year of its purchase. A fixed asset appears in the financial records at its net book value, which is its original cost, minus accumulated depreciation, minus any impairment charges. Because of ongoing depreciation, the net book value of an asset is always declining. However, it is possible under international financial reporting standards to revalue a fixed asset, so that its net book value can increase.

A fixed asset does not actually have to be "fixed," in that it cannot be moved. Many fixed assets are portable enough to be routinely shifted within a company's premises, or entirely off the premises. Thus, a laptop computer could be considered a fixed asset (as long as its cost exceeds the capitalization limit).

Examples of Fixed Assets

There are many types of fixed assets, including buildings, computer equipment, computer software, furniture and fixtures, intangible assets, land, leasehold improvements, machinery, and vehicles.

Accounting for Fixed Assets

Fixed assets are initially recorded as assets, and are then subject to the following general types of accounting transactions:

Periodic depreciation (for tangible assets) or amortization (for intangible assets)
Impairment write-downs (if the value of an asset declines below its net book value)
Disposition (once assets are disposed of)

Fixed assets appear on the balance sheet, where they are classified after current assets, as long-term assets. This line item is paired with the accumulated depreciation line item, resulting in a net fixed assets figure.

Is Inventory a Fixed Asset?

An inventory item cannot be considered a fixed asset, since it is purchased with the intent of either reselling it directly or incorporating it into a product that is then sold.