Definition
Fixed assets, also known as long-term assets or non-current assets, are tangible or intangible assets acquired for long-term use to produce goods or provide services. They are not intended for resale and are expected to generate economic benefits for the company over multiple accounting periods. Examples of fixed assets include property, plant, equipment, land, buildings, and patents.
Key Takeaways
- Fixed Assets, also known as long-term assets, are tangible and intangible assets owned by a business that are expected to be used or held for more than one accounting period or one year.
- These assets form a significant part of an entity’s investment for conducting its day-to-day operations and are not meant for resale. They’re pivotal for a company’s growth and development, as they include property, plant and equipment.
- The utilization or depreciation of fixed assets over time is a regular expense, which is reported in a company’s income statement. This value reduction impacts the entity’s profitability and net reporting in the balance sheet.
Importance
Fixed assets, also known as capital assets, are important in finance as they constitute the long-term tangible pieces of property a company owns and utilizes in the generation of its income. They are crucial to businesses because they are used over and over again for a long period, often multiple years, providing the basis for a major portion of a company’s operations and productivity.
These include land, machinery, buildings, and equipment – assets that are ‘fixed’ or non-current since they cannot be easily converted into cash or aren’t expected to be consumed within a business year. These assets are also critical as they are utilized for capital budgeting purposes and have an impact on a company’s financial stability, operational capacity, and overall business valuation.
Furthermore, their acquisition, maintenance, and depreciation reflect financial management decisions that have significant implications for a company’s balance sheet.
Explanation
Fixed assets, also known as tangible non-current assets, are long-term tangible pieces of property or equipment that a company owns and uses in its operations to generate income. The term “Fixed” implies that these assets are not consumed or sold during the normal course of a business operation.
They are vital elements within a company’s structure and include items such as buildings, equipment, furniture, land, and machinery. These major capital investments are used over an extended period, often several years.
The essential purpose of fixed assets is to aid in the production of income by either directly contributing to the making of goods and services or by supporting the overall business operations. For instance, a manufacturing firm would use machinery (a fixed asset) to produce its goods, while an office-based business might use computer equipment or buildings (fixed assets) to facilitate its operations.
Over time, most fixed assets depreciate in value which is represented as a business expense in a company’s financial statements. Thus, in addition to helping generate revenue, fixed assets also play a key role in a company’s tax strategy.
Examples of Fixed Assets
Buildings and Property: These are considered fixed assets as they have a useful life that extends beyond the tax year, and are not expected to be converted into cash within a year of purchase. For example, the headquarters building of a corporation is a long-term asset that it utilizes over many years.
Machinery and Equipment: Companies in the manufacturing industry, for example, own various machines and equipment for production purposes. These pieces of machinery, which are used for more than one year, are typically heavy duty, expensive, and have a significant lifespan. Therefore, they are considered fixed assets.
Vehicles: For businesses whose operations rely heavily on transportation, vehicles such as cars, trucks, delivery vans, etc., are considered fixed assets. These are not acquired for immediate resale but are utilized to carry out business operations.
FAQ: Fixed Assets
What are Fixed Assets?
Fixed assets are long-term tangible pieces of property or equipment that a company owns and uses in its operations to generate income. They are not easily converted into cash and are typically used over a long period of time.
What is the importance of Fixed Assets?
Fixed assets play a major role in a business’s operations. They are essential in the production of goods and services that a company sells. Also, they enable employees to execute their tasks effectively and contribute to the overall financial health of the company.
What are examples of Fixed Assets?
Examples of fixed assets include buildings, land, machinery, vehicles, furnishings, and equipment.
How do Fixed Assets impact the balance sheet?
Fixed assets are stated on the balance sheet at their cost, less accumulated depreciation. They are key components of total assets and are critical in the assessment of a company’s financial health and capital structure.
What is Depreciation in Fixed Assets?
Depreciation is the reduction in value of a fixed asset over its expected life due to wear and tear, deterioration, or obsolescence. The depreciation of fixed assets is taken into account in financial accounting to determine the true value of assets over time.
Related Entrepreneurship Terms
- Depreciation
- Tangible Assets
- Non-Current Assets
- Asset Lifespan
- Balance Sheet
Sources for More Information
- Investopedia: A comprehensive site for financial and investing education. It offers a variety of resources from articles, dictionaries, videos, to simulators to make learning finance easy and interactive.
- AccountingTools: This site offers incisive knowledge about various accounting topics. It has a whole section dedicated to Assets and Depreciation, including Fixed Assets.
- Corporate Finance Institute (CFI): CFI provides a wide range of resources such as guides, courses, templates, and articles that cover numerous areas in finance including Fixed Assets.
- Financial Express: A complete up-to-date source for business news, finance news, stock market news, and economy news. You can find informative articles on the topic of Fixed Assets.
