What Is a Fixed Asset?
The term fixed asset refers to a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. The general assumption about fixed assets is that they are expected to last, be consumed, or be converted into cash after at least one year. As such, companies are able to depreciate the value of these assets to account for natural wear and tear. Fixed assets most commonly appear on the balance sheet as property, plant, and equipment (PP&E).
- Fixed assets are items that a company plans to use over the long term to help generate income.
- Fixed assets are most commonly referred to as property, plant, and equipment.
- Current assets are any assets that are expected to be converted to cash or used within a year.
- Noncurrent assets, in addition to fixed assets, include intangibles and long-term investments.
- Fixed assets are subject to depreciation to account for the loss in value as the assets are used, whereas intangibles are amortized.
Understanding Fixed Assets
A company's balance sheet statement includes its assets, liabilities, and shareholder equity. Assets are divided into current assets and noncurrent assets, the difference of which lies in their useful lives. Current assets are typically liquid, which means they can be converted into cash in less than a year. Noncurrent assets refer to assets and property owned by a business that are not easily converted to cash and include long-term investments, deferred charges, intangible assets, and fixed assets.
The term alludes to the fact that these assets won't be used up or sold within the accounting period. A fixed asset typically has a physical form and is reported on the balance sheet as PP&E. Companies purchase fixed assets for any number of reasons including:
- The production or supply of goods or services
- Rental to third parties
- Use in an organization
Fixed assets lose value as they age. Because they provide long-term income, these assets are expensed differently than other items. Tangible assets are subject to periodic depreciation while intangible assets are subject to amortization. A certain amount of an asset's cost is expensed annually. The asset's value decreases along with its depreciation amount on the company's balance sheet. The corporation can then match the asset's cost with its long-term value.
How a business depreciates an asset can cause its book value (the asset value that appears on the balance sheet) to differ from the current market value (CMV) at which the asset could sell. Land is one fixed asset that cannot be depreciated.
A fixed asset does not necessarily have to be fixed (i.e., stationary or immobile) in all senses of the word.
The acquisition or disposal of a fixed asset is recorded on a company's cash flow statement under the cash flow from investing activities. The purchase of fixed assets represents a cash outflow (negative) to the company while a sale is a cash inflow (positive). If the asset's value falls below its net book value, the asset is subject to an impairment write-down. This means that its recorded value on the balance sheet is adjusted downward to reflect that it is overvalued compared to the market value.
When a fixed asset reaches the end of its useful life, it is usually disposed of by selling it for a salvage value. This is the asset's estimated value if it was broken down and sold in parts. In some cases, the asset may become obsolete and will, therefore, be disposed of without receiving any payment in return. Either way, the fixed asset is written off the balance sheet as it is no longer in use by the company.
Fixed Assets vs. Current Assets and Noncurrent Assets
Both current assets and fixed assets appear on the balance sheet, with current assets meant to be used or converted to cash in the short term (less than one year) and fixed assets meant to be used over the longer term (more than one year). Current assets include cash and cash equivalents, accounts receivable (AR), inventory, and prepaid expenses. Fixed assets are depreciated, while current assets are not.
Fixed assets are a form of noncurrent assets. Other noncurrent assets include long-term investments and intangibles. Intangible assets are fixed assets to be used over the long term, but they lack physical existence. Examples of intangible assets include goodwill, copyrights, trademarks, and intellectual property. Meanwhile, long-term investments can include bond investments that will not be sold or mature within a year.
Benefits of Fixed Assets
Information about a corporation's assets helps create accurate financial reporting, business valuations, and thorough financial analysis. Investors and creditors use these reports to determine a company's financial health and decide whether to buy shares in or lend money to the business.
Because a company may use a range of accepted methods for recording, depreciating, and disposing of its assets, analysts need to study the notes on the corporation's financial statements to find out how the numbers are determined.
Fixed assets are particularly important to capital-intensive industries, such as manufacturing, which require large investments in PP&E. When a business is reporting persistently negative net cash flows for the purchase of fixed assets, this could be a strong indicator that the firm is in growth or investment mode.
Examples of Fixed Assets
Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.
What Is the Difference Between Fixed Assets and Current Assets?
The major difference between the two is that fixed assets are depreciated, while current assets are not. Both current and fixed assets do, however, appear on the balance sheet.
Fixed assets are company-owned, long-term tangible assets, such as forms of property or equipment. These assets make up its day-to-day operations to generate income. Being fixed means they can't be consumed or converted into cash within a year. As such, they are subject to depreciation and are considered illiquid.
Current assets, on the other hand, are used or converted to cash in less than one year (the short term) and are not depreciated. Current assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
What Are Examples of Fixed Assets?
Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets.
What Are Other Types of Noncurrent Assets?
Other noncurrent assets include long-term investments and intangibles. Intangible assets are those that can lack physical existence but can still be used over the long term. These types of assets include goodwill, copyrights, trademarks, and intellectual property. Long-term investments can include bonds that won't be sold or mature within a year.