Fixed asset explained

Definition

A fixed asset, also known as a tangible or non-current asset, refers to a long-term, physical asset held by a company for use in its operations and not intended for sale in the normal course of business.

What are fixed assets?

Fixed assets are vital for a company’s day-to-day operations and are not expected to be converted into cash within one year.

Examples of fixed assets:

Property, plant, and equipment (PPE): This category includes buildings, land, machinery, vehicles, and other physical assets used in the production process.
Furniture and fixtures: Items like office furniture, fixtures, and equipment that are necessary for business operations.
Intangible assets (in some cases): Some are classified as fixed assets if they have a finite useful life and meet specific accounting criteria.

Fixed assets play a direct or indirect role in revenue generation. For instance, machinery in a manufacturing plant directly contributes to production, while an office building indirectly supports the organisation’s operations.

Fixed assets are subject to depreciation, which is the systematic allocation of their cost over their estimated useful life. This process reflects the gradual wear and tear or obsolescence of the asset.

Fixed assets are a significant component of a company’s financial position and are disclosed in the balance sheet. The accurate valuation and proper accounting of fixed assets are crucial for financial reporting and analysis.

Example of fixed assets

Company ABC, a manufacturing company, has the following fixed assets on its balance sheet as of December 31:

Land: $500,000 – The land on which the company’s manufacturing facility is situated.
Buildings: $2,000,000 – The manufacturing plant and office buildings owned by the company.
Machinery: $1,200,000 – Specialised machinery used in the production process.
Vehicles: $300,000 – Delivery trucks and other vehicles used for transportation.

The total value of fixed assets on Company ABC’s balance sheet is $4,000,000.