Fixed assets are long-term tangible assets that businesses rely on to generate revenue. They have a functional life of more than a year and give long-term financial advantages.
The list above are a few examples of fixed assets; however, they are not necessarily applicable to all businesses. In other words, what one firm considers a fixed asset may not be deemed a fixed asset by another. A delivery firm, for example, would categorise its cars as fixed assets. A car manufacturer, on the other hand, would categorise identical automobiles as inventory.
Note: When categorising fixed assets, take into account the nature of a company's operation.
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The following are the essential features of a fixed asset:
It is one that exists in the physical world and can be touched. Land, machines, and buildings are examples of tangible assets.
It is one that does not exist in the physical world, which can only be felt, not touched. Intangible assets include things like brand awareness, intellectual property, and goodwill, as well as copyrights, trademarks, and patents.
All accumulated Depreciation and losses are subtracted from the total purchase price and improvement cost of all fixed assets recorded on the balance sheet to arrive at the net fixed asset calculation.
Net fixed assets = Total fixed assets - Accumulated depreciation
When a company buys a fixed asset, the cost incurred is recorded as an asset on the balance sheet rather than being expensed on the income statement. Fixed assets are first capitalised on the balance sheet and then gradually depreciated throughout their useful life due to their nature of being employed in the company's activities to produce income. On a company's balance sheet, a fixed asset appears as property, plant, and equipment.
When a business buys or sells a fixed asset with cash, it shows up in the Cash Flow Statement's activities column. Fixed asset purchases are classified as Capital Expenditures, whereas fixed asset sales are classified as proceeds from the sale of property and equipment.
All fixed assets except for land are depreciated. This is to account for the wear and tear incurred as a result of the fixed asset's use in the company's activities. Depreciation decreases the company's net income and appears on the income statement.