Definition: Fixed assets are tangible or physical assets that are owned by a company and expected to provide long-term economic benefit. These assets are not intended for sale in the normal course of business operations, and they are not easily converted into cash. The term fixed implies that these assets have a relatively fixed and lasting value, unlike current assets which are expected to be converted into cash within a year.
Description: Fixed assets, also known as property, plant, and equipment (PP&E) or capital assets, are essential resources that enable businesses to generate income over an extended period. They are typically used to support production, administration, sales, and service activities, and are crucial for the operational continuity and growth of an organization.
Examples of Fixed Assets:
- Buildings and Real Estate: This category includes office buildings, factories, warehouses, and other structures owned by a company. It also encompasses land and the associated costs, such as site development and improvements.
- Machinery and Equipment: This category comprises various types of machinery and equipment used in production or manufacturing processes. Examples include production machinery, vehicles, computers, furniture, and fixtures.
- Intangible Assets: While not tangible in nature, certain assets such as patents, trademarks, copyrights, goodwill, and licenses are considered fixed assets. These assets provide exclusive rights or competitive advantages to the business and are vital for maintaining its market position.
- Infrastructure Assets: Public utilities, such as bridges, roads, pipelines, and telecommunication networks, are considered fixed assets. These assets are typically owned and maintained by government entities or private companies to facilitate transportation and connectivity.
- Leasehold Improvements: When a company leases a property, it may make improvements or modifications to the space to suit its specific needs. These improvements, such as partition walls, electrical upgrades, or HVAC installations, are classified as fixed assets.
- Natural Resources: Companies involved in industries like mining, oil and gas exploration, or forestry often own natural resources as fixed assets. These resources, such as mineral deposits, oil fields, or timber reserves, are extracted over time and contribute to the company’s operations and revenue.
Measurement and Depreciation: Fixed assets are recorded on a company’s balance sheet at their historical cost, which includes all costs directly related to their acquisition and installation. To reflect their diminishing value over time due to wear and tear, obsolescence, or market conditions, fixed assets are subject to depreciation. Depreciation methods, such as straight-line, declining balance, or units-of-production, are used to allocate the asset’s cost over its estimated useful life.
Proper management of fixed assets is essential for accurate financial reporting and effective decision-making. Companies need to have robust systems in place to monitor, maintain, and update fixed asset records, including regular physical audits to ensure the assets’ existence, condition, and accurate valuation.
Note: Fixed assets can vary across different industries and organizations. It is recommended to consult industry-specific guidelines, accounting standards, and professional advice for precise classification and valuation of fixed assets.
References:
– Financial Accounting Standards Board. (2018). Accounting Standards Codification: Property, Plant, and Equipment (Topic 360). https://asc.fasb.org.
– Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (17th ed.). Wiley.
