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What are Fixed Assets?

IndianMoney.com Research Team | Updated On Monday, February 04,2019, 06:09 PM

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What are Fixed Assets?

 

 

What are Fixed Assets? Types, Importance and Benefits

What are Fixed Assets?

Fixed assets are the material assets owned by a company that are used to generate revenue for the company. These are the long term assets that cannot be readily converted into cash. Fixed assets include Land and Buildings, Plant and Machinery, Equipment (from office equipment to heavy operating machinery), vehicles, fixtures, and other assets that can reasonably be assumed to have a life expectancy of several years. Generally the value of fixed assets reduces over time. These assets are categorised as noncurrent assets in the balance sheet of the company.

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What are Fixed Assets? Types, Importance and Benefits

Importance of Fixed Assets:

  • A fixed asset is a resource purchased by an enterprise or company for business purposes that have long term value. 
  • Some fixed assets depreciate in value allowing businesses to pay for fixed assets over their expected life term. This helps them recover the initial cost and generate income.
  • Fixed assets are key resources for businesses and represent a significant proportion of the total assets owned by the organisation.
  • Fixed assets help improve the organizations financial position. The value of these assets influences the accounts of the organisation.
  • Depreciation of these assets yields tax benefits.

See Also: Asset Allocation

Types of fixed assets:

Fixed assets can be divided into two main categories. They are summarized below:

  • Tangible assets: the tangible assets are the assets that are owned or maintained for the growth of the business. Tangible assets include buildings, land, hardware, various equipment, vehicles, furniture, plant, computer and machinery.
  • Intangible assets: intangible assets are not physical assets, but exist in the form of patents, copyright, trademark, website or innovations. The price of these assets is difficult to evaluate.

Benefits of Fixed Asset:

  • Business viability: business viability is understood by evaluating the value of the fixed assets throughout its life and the possibility of turnover it gives.
  • Return on assets: the financial health of the company is evaluated based on the return from assets.
  • Fixed asset turnover: after investing in a fixed asset, the primary concern of the company is to keep track of whether the asset is generating income or not. This is known as fixed asset turnover.

Depreciation of Fixed Assets:

In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset due to wear and tear until the value of the asset becomes negligible.

Depreciation of fixed assets is done to calculate how using these assets affect the profit and loss statement of the company. In the company’s financial report, the depreciation of fixed assets is shown. Fixed asset depreciation is a very crucial area because the net profit shown in the financial statement is dependent on the method of depreciation. Depreciation of fixed assets can be calculated using the following methods:

  • Straight line method
  • Double declining balance
  • Units of production method
  • Written down value method

See Also: What is meant by Asset Allocation?

Fixed assets and current assets:

Given below is a tabular representation of the key differences between fixed assets and current assets:

Basis of comparison

Fixed assets

Current assets

Meaning

Fixed assets are long term assets that are acquired by an entity for the purpose of continuous use and income generation

Current assets refer to those assets which are owned by the company to be traded and are held for not more than a year.

Convertibility

Cannot be converted into cash easily

Can be easily converted into cash

Holding period

These assets are bought for long term i.e. more than a year

Holding period is less than a year

Pledge

Cannot be pledged

Can be pledged

Financing

Long term funds are used for financing fixed assets

Short term funds are used to finance current assets

Charge

Results in creation of fixed charge

Results in creation of floating charge

Sale of assets

Will either result in capital profit or loss

Will result in revenue profit or loss

Fixed assets list:

  • Fixed assets are purchased to provide economic benefit to the organisation. When you purchase a fixed asset, you have to create a record or list of fixed assets, whether in Excel or other software programs. This is known as fixed assets list. This list helps maintain an account of the fixed assets owned by the organisation and can be recorded as financial data in the companies file. Given below are the different resources that can be accounted as fixed assets:
  • Buildings and plants
  • Computer equipment
  • Computer software
  • Furniture and fixtures
  • Equipments and machinery
  • Intangible assets
  • Vehicles and land assets

Fixed Asset Formula:

The formula used for fixed assets turnover is as follows:

Fixed assets turnover formula = net revenue / average net fixed assets.

- Net revenue is the revenue excluding the returns.

- Average net fixed assets mean fixed assets minus depreciation.

Examples of Fixed Assets:

Summarized below are the examples of fixed assets based on their categories:

  • Plant and Machinery: includes all the facilities and material assets owned by the organization.
  • Computer equipment: includes the computer equipment owned by the organisation like laptops, desktops, headphones, speakers, printers, scanners and so on.
  • Computer software: Usually includes the most expensive types of software; all others are charged to expense as incurred.
  • Furniture and fixtures: these include the chairs, tables, office furniture’s, cubicles and so on.
  • Equipments and machinery: production equipment and machinery helps in production.
  • Intangible assets: refers to all non tangible assets like cost of patents, trademark, websites and copyrights.
  • Vehicles: includes assets like cars, trucks, buses and other moving and construction vehicles like cranes and so on.
  • Land: includes the purchase of or cost of land. Also includes the cost of land improvements.

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