Fixed Assets: Characteristics, Types And Examples

The fixed assets  Non – current assets or properties are long – term tangible a company owns and uses in its operations to generate revenue. Fixed assets are not expected to be consumed or converted to cash within a year.

Fixed assets are also known as capital, property, plant and equipment assets. They are usually listed on a company’s balance sheet below current assets.

These assets are held by a company for the purpose of producing goods or providing services, rather than being held for resale in the normal operation of the business. For example, machines, buildings, patents or licenses, can be fixed assets of a company.

A fixed asset does not have to be really “fixed”, because it cannot be moved. Many fixed assets are portable enough to be routinely moved within a business premises, or even taken off site.

Therefore, a laptop or furniture can be considered fixed assets, as long as their cost is greater than the capitalization limit.

Importance

Information about a corporation’s assets helps create accurate financial reports, business valuation, and comprehensive financial analysis. Investors and creditors use these reports to determine the financial health of a company and to decide whether to buy shares or lend money to the company.

Because a company can use a variety of accepted methods to record, depreciate, and dispose of its assets, analysts should study the notes in the corporation’s financial statements to find out how these numbers were determined.

Fixed assets are particularly important for capital-intensive industries, such as manufacturing, that require large investments in property, plant, and equipment.

When a company consistently reports negative net cash flows for the purchase of fixed assets, this could be a strong indicator that the company is in growth mode.

characteristics

Assets are divided into current assets and non-current assets, the difference of which lies in their useful lives.

Current assets are usually liquid assets that can be converted to cash in less than a year. On the other hand, non-current assets refer to assets and properties that are owned by a company and that are not easily converted into cash.

The different categories of non-current assets include fixed assets, intangible assets, long-term investments, and deferred charges.

A fixed asset is purchased for the supply of goods or services, for the production process, for use in the organization or for renting to third parties.

The term ‘fixed’ translates to the fact that these assets will not be fully consumed or sold within the accounting year. A fixed asset has a tangible physical form.

When a company acquires or disposes of a fixed asset, it is recorded in the statement of cash flow under investing activities. The purchase of fixed assets represents a cash outflow for the company, while a sale is a cash inflow.

Asset value

If the asset’s value falls below its net book value, the asset is subject to amortization for impairment. This means that its value on the balance sheet is adjusted downward to reflect that it is overvalued compared to market value.

When a fixed asset has reached the end of its useful life, it is generally disposed of by selling it for a salvage value, which is the estimated value of the asset if it were broken down and sold in parts.

On some occasions, the asset may become obsolete and no longer have a market for it. Therefore, you must be excluded without receiving any kind of payment in return. In any case, the fixed asset is removed from the balance sheet, because the company will no longer use it.

Depreciation

Depreciation is an accounting method that distributes the cost of a fixed asset over its useful life.

Fixed assets are depreciated for accounting purposes. Under the International Accounting Standards Board, the depreciation of a fixed asset is considered an expense in the financial statements of a company. This is because it spreads the cost of the asset over its useful life.

Since fixed assets are resources or long-term investments of a company, where their full value is not realized in a year, their costs are also depreciated over the years or their useful lives.

Depreciation helps businesses as they don’t have to allocate the initial total cost of an asset when it is purchased.

Tax depreciation is generally calculated differently than depreciation for financial reporting.

Unless it contains natural resources, land cannot depreciate, because it cannot be depleted.

Straight line depreciation

Fixed assets can be depreciated using the straight-line depreciation method, subtracting the asset’s recovery value from its base cost and dividing it by the total number of years of its useful life.

Therefore, the straight-line depreciation expense is the same for each year of its useful life.

For example, an automobile manufacturer buys a machine that will produce doors for its automobiles. The base cost of this machine is $ 5 million. The expected life of the machine is 15 years.

The company believes that after 15 years it will be able to sell the machine for $ 500,000. Therefore, the depreciation expense for the machine is $ 300,000 (($ 5 million – $ 500,000) / 15) per year. At the end of the asset’s useful life, the machine will be accounted for using its salvage value of $ 500,000.

The way a business depreciates an asset can cause its book value, or the amount paid for the asset, to differ from the market value at which the asset could be sold.

Types

Net fixed assets

Depreciation is the expense generated by the use of a fixed asset. It is the wear and tear of an asset or the decrease in historical value due to use.

A fixed asset appears in financial records at its net book value. This is your original cost, less accumulated depreciation, less any impairment charges.

Due to ongoing depreciation, the net book value of an asset is always decreasing. However, under international financial reporting standards it is possible to revalue a fixed asset, so that its net book value can increase.

The net book value of a fixed asset is basically the difference between the historical cost of that asset and its associated depreciation.

Clearly, to report a true and fair financial interpretation of an entity, the value of fixed assets must be recorded and reported at their net book value.

Apart from the fact that it is included in the Accounting Standard IAS 16 that the value of the asset must be carried on the books at the net value, it is the best way to present the value of the assets to the owners of the company and potential investors.

Stupid

It is pertinent to bear in mind that the cost of a fixed asset is its purchase price. Import duties, other discounts, and deductible business rebates are included.

Additionally, the cost attributable to bringing and installing the fixed asset in its necessary location and the initial estimate for the dismantling and disposal of the asset, if eventually it is no longer necessary in the location.

The gross value of the fixed asset is its purchase cost, without taking into account depreciation.

Fixed assets accounts

If the business has fixed assets, the accounting standards can be completed as a manual to adequately represent these long-range assets in the accounting records.

The particular changes that influence capital include the purchase, revaluation, devaluation and sale of fixed assets.

These transactions are vital to the accuracy of the company’s financial records and reports. Good accounting software can help you easily record them.

It is beneficial, and necessary, for every business to have a clear idea of ​​its overall value and assets by understanding not only what fixed assets it owns, but also the value of each individual asset.

Tracking ongoing depreciation helps companies understand the present value of fixed assets. It also helps plan routine maintenance to maximize the life of high-value assets and avoid the costs associated with premature repair and replacement.

Fixed asset register

It is a list of fixed assets that belong to an entity. Traditionally, the fixed asset register was kept in written form by an accountant, using a book that had been specifically reserved for that purpose.

Today, it is more often carried out in electronic format in an accounting system.

The primary purpose of a fixed asset account register is to track the book value of assets and determine the depreciation to be calculated, recording it for management and tax purposes.

A secondary purpose is to allow easy identification of an asset, assigning each asset a unique identification. This can be printed on labels in the form of a barcode.

Tangible

These fixed assets include, for example, buildings, land, hardware, miscellaneous equipment, vehicles, furniture, and much more. You can think of tangible resources as the things that are needed to stay in business.

To value them, you start with the value with which it was obtained or rented. Next, the appropriate depreciation strategies are applied to gradually decrease its value.

For example, some fixed assets, such as land or structures, can appreciate and not depreciate, when they are held for a long time. This factor must also be considered in the balance sheet.

Intangible

These can incorporate goodwill, licenses, names or trademarks. Even also phone numbers, any innovations and websites, if they ever plan to sell.

For assets like phone numbers, trademarks, or proprietary things, it’s a bit more difficult to decide the value.

Goodwill is an elusive resource. However, this type of asset is easier to calculate by finding the difference between the actual cost of the organization and the cost for which it is sold or bought. Most other intangible resources are difficult to estimate.

Some accountants classify long-term intangible assets, such as trademarks and patents, as fixed assets. More specifically, they refer to them as fixed intangible assets.

Examples

An inventory item cannot be considered a fixed asset, as it is purchased with the intention of reselling it directly or incorporating it into a product that is later to be sold. The following are examples of general categories of fixed assets:

– Buildings.

– Computing team.

– Computer software.

– Furniture and accessories.

– Intangible assets.

– Land.

– Machinery.

– Vehicles.

For example, if a business sells products, its delivery trucks are fixed assets. If a company creates a parking lot in the company, the parking lot is a fixed asset.

A typical case of fixed assets is the resources of a producer’s plant, for example, its structures and hardware. The word “fixed” indicates that these assets will not be sold in the current accounting year.

According to the Financial Accounting Standards Board, all assets must provide reasonably estimated future economic benefits. They must also be controlled by the owner and be the result of a previous event or transaction, such as a purchase.

XYZ Company

Suppose Company XYZ intends to purchase an office building for $ 10 million. The building has a physical form, will last more than a year and will generate income, therefore it is a fixed asset.

When the company executes a legal purchase agreement with the seller, the XYZ Company will have a place from which to conduct its business operations. It will also control what happens in the building from that moment on.

Therefore, Company XYZ acquired an asset of $ 10 million and should reflect this fixed asset on its balance sheet.

Fixed assets additionally incorporate any property that the organization does not sell directly to the customer. These can be furniture, motor vehicles, computers, and much more. Suppose they cost about $ 1 million.

Thus, the firm XYZ acquired fixed assets for a total value of $ 11 million. This will also be reflected in your balance. These fixed assets are useful in calculating the general income of the company.

References

  1. Steven Nickolas (2018). What are common examples of noncurrent assets? Investopedia. Taken from: investopedia.com.
  2. Will Kenton (2017). Fixed Asset. Investopedia. Taken from: investopedia.com.
  3. Wikipedia, the free encyclopedia (2019). Fixed asset register. Taken from: en.wikipedia.org.
  4. Wikipedia, the free encyclopedia (2019). Fixed asset. Taken from: en.wikipedia.org.
  5. CA Mohnish Katre (2019). What Is Fixed Asset. Profit Books. Taken from: profitbooks.net.
  6. Steven Bragg (2019). Fixed asset. Accounting Tools. Taken from: accountingtools.com.
  7. Investing Answers (2019). Fixed Asset. Taken from: investinganswers.com.

Add a Comment

Your email address will not be published. Required fields are marked *