What Are Fixed Assets?
Fixed assets are tangible (physical) items or property that a company purchases and uses for the production of its goods and services.
Fixed assets are long-term assets. This means the assets have a useful life of more than one year. Fixed assets include property, plant, and equipment (PP&E) and are recorded on the balance sheet with that classification.
While a company may also possess long-term intangible assets, such as a patent, tangible assets normally are the primary type of fixed asset. That’s because a company needs physical assets to produce its goods and/or services.
Key Takeaways
- Fixed assets can be tangible or intangible.
- Fixed assets have a useful life of more than one year.
- The difference between a fixed asset and a current asset is that a fixed asset can’t be converted to cash easily or quickly.
- Fixed assets are recorded on a company’s balance sheet, usually with the Property, Plant and Equipment classification.
- Fixed assets are depreciated over their useful lives to reflect wear and tear and to reduce the cost of the assets on the balance sheet.
Understanding Fixed Assets
Fixed assets cannot be converted into cash easily. They are noncurrent assets that are not meant to be sold or consumed by a company. Instead, a fixed asset is used to produce the goods that a company then sells to obtain revenue. Fixed assets cannot be converted into cash easily.
On the other hand, current assets are assets that the company plans to use within a year and can be converted to cash easily. One example of a current asset would be accounts receivable. While current assets help provide a sense of a company’s short-term liquidity, long-term fixed assets do not, due to their intended longer lifespan and the inability to convert them to cash quickly.
Fixed tangible assets are depreciated over their lifetimes to reflect their use and the depletion of their value. Depreciation reduces the recorded cost of the asset on the company balance sheet. The depreciation expense is recorded on the income statement and reduces the company’s net income.
Most tangible assets, such as buildings, machinery, and equipment, are depreciated. However, land cannot be depreciated because it cannot be depleted over time unless it contains natural resources.
Examples of fixed assets include:
- Vehicles such as company trucks
- Office furniture
- Machinery
- Buildings
- Land
Investors can be keenly interested in a company’s fixed assets. They often look at the fixed asset turnover ratio to understand how well a company uses its fixed assets to generate sales. The ratio compares net sales to fixed assets. It’s often used when comparing more than one company as a potential investment.
Example of Fixed Assets
Say, company ABC manufactures and sells toys. The company purchases a new office building for $5 million. It also buys machinery and equipment that costs a total of $500,000. The company projects that it will use the building, machinery, and equipment for the next five years.
These assets are considered fixed, tangible assets because they have a physical form, will have a useful life of more than one year, and will be used to generate revenue for the company.
They are recorded on the company’s balance sheet. The company then will depreciate these assets over the five-year period to account for their cost. The depreciation expense is moved to the income statement where it’s deducted from operating profit. Depending on what the asset is used for, this expense may be shown in cost of goods sold or in the selling, general and administrative category. While the IRS does not usually allow the depreciation expense itself as a deduction from taxable income, tax authorities do allow a predetermined amount of an asset’s cost to be deducted from taxable income, reducing a company’s tax expense.
What Is a Fixed Asset?
A fixed asset, or noncurrent asset, typically is an actual, physical item that a company buys and uses to make products or services that it then sells to generate revenue. For example, machinery, a building, or a truck that’s involved in a company’s operations would be considered a fixed asset. Fixed assets are long-term assets, meaning they have a useful life beyond one year. While tangible assets are the main type of fixed asset, intangible assets can also be fixed assets.
What Is a Current Asset?
Contrary to a noncurrent, fixed asset, a current asset is an asset that will be used or sold within one year. Current assets can be converted to cash easily to pay current liabilities. Together, current assets and current liabilities give investors an idea of a company’s short-term liquidity. Examples of current assets are cash, cash equivalents, accounts receivable, and inventory.
Is Intellectual Property a Fixed Asset?
Yes, intellectual property can be considered a fixed asset even though it is an intangible (not physical) asset. Intellectual property that’s a fixed asset is intended by a company to produce revenue for the company. Copyrights, trademarks, and patents are examples of intellectual property.
Read the original article on Investopedia.