Companies of all sizes and industries have assets — items they control that bringcurrent and future benefit to their business. Assets are listed on a company's balancesheet and their value is generally proportional to a company's valuation. In otherwords, the more assets in a business, the higher the business's total value is likelyto be.
Certain assets, called fixed assets, provide value to a company over multiple fiscal years.Commonly called property, plant and equipment (PPE), their primary function is to support abusiness's operations. Fixed assets tend to be substantial — not only in terms ofcost and, sometimes, physical size, but also in the ways their accounting treatment bringsbenefits to a company.
Fixed assets and intangible assets such as patents, copyrights and trademarks are types ofnoncurrent assets. People sometimes use the phrases "intangible fixed asset" and"tangible fixed assets" to distinguish between the two, but the term "fixedasset" without a modifier typically refers to tangible fixed assets — andthat's how we'll refer to them in this article.
What Is a Fixed Asset?
Fixed assets are tangible, long-lived assets used by a company in its operations, such asmachinery, factories, tools, furniture and computers. They are listed in the noncurrentasset section on a company's balance sheet because their useful lives extendbeyond one year.
Assets vs. Fixed Assets:
Assets are one of seven accounting elements: assets,liabilities, equity, revenue, expense, gains and losses. "Assets" is the umbrellaterm for all resources that have value and are controlled by their owner, such as cash,machinery and patents. There are several classifications of assets, determined by certaincharacteristics, including their ability to be converted to cash, their use in operationsand their physical existence. Fixed assets constitute the PPE subset of total assets.
Fixed Assets vs. Current Assets:
Fixed assets and current assets are two classifications of assets; they are distinguishedfrom each other based on the amount of time it would take to be converted to cash. Currentassets include cash and other assets that can be easily converted to cash within a 12-monthperiod. Examples include money market accounts, inventory, securities and accountsreceivable.
Fixed assets are held for morethan a year because they have longer useful lives and are not expected to be converted tocash sooner. Examples include vehicles, manufacturing equipment, furniture and buildings.Fixed assets are depreciated over their useful life, unlike current assets, which are notdepreciated. Fixed assets are reported as PPE on a company's balance sheet in thenoncurrent asset section.
Different Asset Classifications
Overall, "assets" is the broad term for all resources controlled by a company, fromcash to patents. Given the potential diversity of a company's assets, assetclassifications can become confusing for people who don't deal with them often. Amongthe several subsets under the assets umbrella there are current assets and fixed assets (asdescribed above) as well as tangible/intangible.
For example, inventory is classified as a tangible asset; accounts receivable and patents areclassified as intangible assets. In addition, assets are often described as operating vs.non-operating, but these are descriptors rather than official balance sheet classifications.An assembly line would be an operating asset; the CEO's company car would benonoperating and likely listed under "Other Assets."
Differences Between Fixed Assets & Current Assets
| Current Assets | Fixed Assets | |
|---|---|---|
| Easily Converted to Cash | Yes | No |
| Useful Life | Less than 12 months | Longer than 12 months |
| Operating Assets | Yes | Yes |
| Tangible | Sometimes | Yes |
| Depreciable | Sometimes | Yes |
| Examples | Cash Accounts Receivable Inventory Prepaid Expenses | Vehicles Machinery Equipment Land |
| Where disclosed on Balance Sheet | Under Current Assets | Under Noncurrent Assets |
| Potential Income Statement impact | Varied. E.g., uncontrolled accounts receivable hit as bad dept expense;Old inventory written off as obsolescence expense. | Related depreciation expense; or any gain/Loss on sale or otherdisposal. |
| Affected Statement of Cash Flow section | Operating Activity | Investing Activity |
| * except for land |
Key Takeaways
- Fixed assets are tangible, long-lived resources used to produce products and services.
- Fixed assets tend to be high in value, so more fixed assets help raise a company'svaluation and expand its access to capital.
- Capitalization and depreciation are accounting treatments of fixed assets that bringbenefits to a business and are reflected in financial statements and tax returns.
- Accounting for fixed assets is achieved most accurately and efficiently with fixedassets management software.
Fixed Assets Explained
Fixed assets are the machinery, equipment and tools necessary for a company to make theproducts it is in business to sell. Economists often refer to assets as being either capitalgoods or consumer goods — consumer goods are those sold to customers for their use;capital goods are used to produce the consumer product (or service) to be sold. Fixed assetsare considered capital goods, in that they are acquired by a business to generate incomefrom its operations and are not intended for resale to a customer.
Why Are Fixed Assets Important?
Fixed assets are important primarily because they help the business do its work and earnrevenue. In addition, because of their high value, fixed assets increase a company'snet worth and can also be used as collateral for loans. More specifically:
They support the business.
Most companies require fixed assets to generate revenue. Some fixed assets, likemachinery or vehicles, are directly deployed to provide products or services, whileothers support administrative functions. Office furniture and computer hardware areexamples of the latter. The addition of fixed assets may enable a company to expandits current level of production.
They increase a company's valuation.
Fixed assets tend to be high value items and, thus, represent a significant part of acompany's overall value. The more fixed assets a company has, the higher itsvaluation may be to investment, merger and acquisition partners. This is especiallytrue in industries that are very asset-intensive, such as manufacturing, where theratio of fixed assets to total assets is high.
Their value can help drive growth.
The value of a company's fixed assets can be used as collateral for loanscompanies can use to pursue new opportunities. Access to additional capital, such asa revolving line of credit collateralized by a company's warehouse, may help abusiness improve its cash flow.
Benefits of Fixed Assets
Fixed assets are included on a company's balance sheet but their benefits don'tstop there. The accounting treatments of fixed assets influence income statements, statements of cashflows and tax returns, where the benefits they impart are the result ofcapitalization — the accounting treatment that records an asset on the balance sheetat acquisition and reduces its value via depreciation over time, rather than expensed all atonce. Here's how fixed assets benefits flow through each type offinancial statement:
Balance sheets.
Fixed assets are followed by investors assessing the value of a company and are shownin the noncurrent asset section of the balance sheet, net of the associatedaccumulated depreciation. This net value reflects ongoing reduction in value as thefixed asset ages. The balance sheet separates PPE fixed assets from other noncurrentassets, because PPE is a line item that is often analyzed by external investors andpartners when valuing a company.
Income statements.
While fixed assets appear as part of the balance sheet, the related depreciationexpenses are shown on the company's income statement.There are several depreciation methods that comply with the Generally AcceptedAccounting Principles (GAAP), all aimed at spreading the cost of a capitalized assetover the time that that asset continues to provide economic benefit. For example,the costs of a $100,000 forklift with an estimated useful life of 10 years would bemore fairly represented on the income statement as a $10,000 expense per year of itslife, rather than as a single, $100,000 expense in the year of acquisition and $0 ineach of the subsequent nine years.
Statements of cash flows.
There are two ways fixed-asset treatment benefits are reflected in a company'sstatement of cashflows. First, the depreciation expense that was included in net income onthe income statement is reversed on the statement of cash flows, since it is anoncash expense. Doing this helps maintain focus only on cash expenses, for purposesof analyzing liquidity. Second, all fixed asset activity is contained within the"cash flows frominvesting activity" section of the statement of cash flows, to separate it fromcontinuing operations. Although fixed assets are fundamental to operations,purchasing and disposing of fixed assets are unique, nonrecurring transactions, soit helps to capture the activity separately from the day-to-day operatingactivities.
Tax returns.
Fixed assets enjoy special tax benefits in the U.S. and abroad. Specifically, theU.S. tax code allows companies to reduce their taxable income for depreciation. Bydoing so, a company can maximize its fixed asset "deduction" by spreadingit out over time and allowing it to offset revenue in multiple periods. In fact, theU.S. Internal Revenue Service (IRS) uses accelerated methods of depreciation thatachieve the spreading effect over a shorter time than GAAP guidance suggests. Forexample, a vehicle may depreciate over five years for tax purposes but may have aneight-year useful life for GAAP accounting.It's important to check with your tax adviser to be aware of all possiblebenefits available in specific tax jurisdictions.
A key exception to this discussion relates to land. Like other fixed assets, land iscapitalized on the balance sheet. However, land does not depreciate and does notaffect the income statement, statement of cash flows or tax returns in the same wayas other fixed assets. Land does not qualify for depreciation because it does notdecline in value from use, exhaustion and obsolescence in the same way a piece ofmachinery might.
Characteristics of Fixed Assets
When determining the proper classification of an asset, there are several characteristicsthat set fixed assets apart from other asset types.
Purpose:
Companies acquire fixed assets for use in operations that support production of goodsor services — they are not acquired for resale. For example, a constructioncompany would buy a truck for use on job sites, not to resell. Nor are fixed assetsincorporated into finished goods, like raw material assets would be. For example,lumber cannot be a fixed asset for the construction company, since it ultimatelybecomes part of the completed building.
Long life:
By their nature, fixed assets are beneficial for more than one fiscal cycle, oftenfor many years. Because of this, their value is depreciated over the course of thefixed asset's useful life in accordance with the matching principle ofaccounting, rather than as a single expense in the period purchased. For example, awarehouse is expected to last for several years and is depreciated over time. Landis a notable exception.
Tangibility:
Fixed assets are substantial — they are tangible assets that physically exist.Examples include tools and machinery. By contrast, long-lived intangible assets,such as patents, are noncurrent assets but are not considered fixed assets.
Accounting for Fixed Assets
Since fixed assets are long-lived, the accounting issues for them change over their lifecycle. Fixed assets are initially capitalized when acquired and then systematicallydepreciated over the course of their useful lives. While they are in operation, their valueis reassessed and adjusted downwardly for any impairment detected by periodic comparison tomarket value or whenever an unusual circ*mstance occurs. Ultimately, the accountingprocesses related to their disposal, retirement or scrapping reflect these reevaluations,possibly creating a gain or loss on the fixed asset.
Fixed Assets and Financial Statements
At acquisition, fixed assets are recorded on the balance sheet at the price paid plus anyadditional costs to make it ready for use, such as installation costs. Depreciation expensesh*t the income statement each period. A "contra-asset" account on the balancesheet, called accumulated depreciation, is where periodic depreciation charges accumulate,reflecting the running balance of the fixed asset when combined with the asset account. Thisnet value is periodically compared to market value, especially if something significantoccurs with the fixed asset, such as a fire. Accountants reduce the value of fixed assetsfor impairment, but they do not increase the value unless actual expenditures are made toincrease the amount capitalized.
Depreciation of Fixed Assets
Depreciation is the systematic reduction of the value of a capitalized asset over time.Depreciation expense for a given period is a debit that reduces income on a company'sincome statement, and the offsetting credit builds up in the accumulated depreciationaccount on the balance sheet. A critical part of accounting for fixed assets is determiningthe length of an asset's useful life, or how long the asset will yield economicbenefit. This estimate should be based on some reasonable expectation, such as anticipatedusage. Both GAAP and the IRS provide guidance on length of useful life for distinct types offixed assets. Another part of accounting for depreciation of fixed assets is estimatingwhether the asset will have any salvage value when disposed of, which would reduce a fixedasset's depreciable base. The last step is to select an appropriate depreciation method,such as straight line, units of production or declining balance. The method selected maydiffer for financial statement purposes versus tax filings.
Examples of Fixed Assets
Fixed assets come in many forms. They are usually inventoried individually but grouped asfollows in the fixed asset accounts in a company's general ledger:
Land:
Land used for business operations is a fixed asset. Land held for speculation orresale (as by a real estate company) is not a fixed asset.
Buildings and factories:
Offices, warehouses, factories, workshops and garages are among the fixed assets inthis category.
Furniture and fixtures:
Office equipment, desks and tables are considered fixed assets, as are fixtures suchas sinks, cubicle walls or rugs (that is, any built-in item that cannot be removedwithout damage to the asset).
Leasehold improvements:
Additions and upgrades to leased or rental property — think: retail shelving,paint, erection of office walls, carpentry, electrical and plumbing upgrades —are fixed assets.
Computer hardware, software and office equipment:
Computer hardware is a fixed asset, including tablets, PCs and servers. Purchasedsoftware, like enterprise packages and cloud-based applications, are also consideredfixed assets. Office equipment like copiers and telephones are included, too.
Vehicles:
Cars, trucks, tractors and forklifts are examples of fixed-asset vehicles.
Machinery and equipment:
Heavy-duty machinery — like assembly lines, cranes and equipment such as X-raymachines, lawn mowers and pizza ovens — is considered a fixed asset.
Tools:
Typically, low-price tools may be expensed, but higher-value items that last morethan a year are included in fixed assets. Companies typically set a"materialitythreshold" for including tools in fixed assets.
Increase Efficiency and Accuracy With NetSuite Fixed Assets Management
Fixed assets are expensive but important assets for most businesses — they help to keepthe business running. But fixed assets have various specific accounting requirements aswell. Fixed asset management software, such as NetSuite FixedAssets Management, eliminates the hassle of managing fixed assets using manualspreadsheets. Having a complete, automated inventory of every fixed asset, large or small,and linking it with its historical cost and depreciation schedule, helps physicallysafeguard those assets and streamline accounting for them. And since your assets are likelynot located all in one place, the cloud-based accessibility offered by software likeNetSuite Fixed Assets Management can help your operations and accounting staff manage allthose fixed assets more accurately and efficiently.
Fixed assets are tangible, expensive assets that are critical for business operations. Theyhelp a company produce its products or services in order to make money. Because they arecapitalized and depreciated over time, they carry particular financial statement and taxbenefits. Since external parties will analyze fixed assets when valuing a company orextending collateralized loans, safeguarding those fixed assets and exercising correctaccounting procedures are important, and can more accurately and efficiently be accomplishedwith solid fixed-asset management software.
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Fixed Asset FAQs
What are examples of fixed assets?
Examples of fixed assets include land, buildings, heavy machinery, vehicles and IT equipment.They are tangible assets that provide operational benefit for longer than one year.
What are the 3 types of assets?
Assets can be thought of in terms of their convertibility to cash, whether they are tangibleor intangible, and whether they are operating or nonoperating. Fixed assets are tangible,operating assets that are not easily convertible to cash.
What is a fixed asset and its types?
Fixed assets are tangible, long-lived assets used by a company in its operations, such asmachinery, factories, tools, furniture and computers. They are noncurrent assets becausethey have useful lives that extend beyond one year.
