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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See Also: Asset Allocation
Fixed assets can be divided into two main categories. They are summarized below:
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:
See Also: What is meant by Asset Allocation?
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 |
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.
Summarized below are the examples of fixed assets based on their categories:
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