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Fixed Assets
Definition of
Fixed Assets
What are Fixed Assets? Fixed assets, also commonly referred to as Property, Plant, and Equipment (PP&E) or tangible assets, are long-term physical assets that a company owns and uses in its operations to generate income. Unlike current assets, fixed assets are not expected to be consumed or converted into cash within one year. Examples include land, buildings, machinery, equipment, vehicles, and furniture. These assets are recorded on the Balance Sheet and are subject to depreciation (except for land) over their useful life.
Activities Related to
Fixed Assets
Here is a list of activities related to Fixed Assets: Acquiring fixed assets through purchase or construction (Capital Expenditure). Recording the original cost of the asset. Calculating and recording annual depreciation expense and accumulated depreciation. Performing periodic maintenance and repairs. Assessing assets for asset impairment. Disposing of fixed assets through sale, retirement, or exchange, and recording any gain or loss. Maintaining a fixed asset register for effective asset tracking.
The Importance of
Fixed Assets
Fixed assets are important because they represent significant investments by a company and are essential for its ongoing operations and revenue generation. Proper accounting for fixed assets ensures that the Balance Sheet accurately reflects the company's investment in long-term resources and that the Income Statement correctly reports depreciation expense. Effective fixed asset management helps in optimizing their use, planning for replacements (capital budgeting), and safeguarding these valuable resources. They are also crucial for calculating various financial ratios like the asset turnover ratio.
Key Aspects of
Fixed Assets
Tangible Nature
They have a physical form (e.g., buildings, machinery).
Long-Term Use
Expected to be used in the business for more than one year.
Not for Resale
Acquired for use in operations, not for regular sale to customers (unlike inventory).
Depreciation
Their cost is allocated as an expense over their useful life through depreciation (except land). Our asset tracking services help manage this.
Concepts Related to
Fixed Assets
Fixed Assets are a major category on the Balance Sheet. Their acquisition involves Capital Expenditures and is planned through Capital Budgeting. The value of fixed assets is reduced over time by Depreciation, which is accumulated in the Accumulated Depreciation account. The book value of a fixed asset is its original cost less accumulated depreciation. In cases of significant decline in value, an asset impairment may be recorded.
Fixed Assets
in Action:
The Adventures of Coco and Cami
Coco shows Professor A her new baking oven and the delivery van she uses for her bakery. Professor A explains that these are Fixed Assets – long-term items she uses to run her business, not things she sells directly to customers like her cakes.
Cami points to the display racks, cash register, and even the building her boutique is in (if she owns it) as her fixed assets. They learn that these assets lose value over time through depreciation, which is important to track for accurate financial reports. Effective asset tracking is key.