Define fixed asset

A fixed asset, also known as a non-current asset, is a long-term tangible asset that a company owns and uses in its operations to generate income. These assets are not expected to be consumed or converted into cash within a year. Instead, they are used over multiple accounting periods and are subject to depreciation (except for land, which is not depreciated).

Characteristics of Fixed Assets

1. Long-Term Use: Fixed assets are intended for use in the company's operations for more than one year.
2. Tangible Nature: These assets have a physical form (e.g., machinery, buildings, vehicles).
3. Depreciation: Most fixed assets depreciate over time, meaning their value decreases due to wear and tear, obsolescence, or other factors. Depreciation is recorded as an expense in the income statement.
4. Capital Expenditure: The purchase of fixed assets is considered a capital expenditure, which means the cost is capitalized and spread over the useful life of the asset through depreciation.

Examples of Fixed Assets

• Land: Although land is a fixed asset, it is not depreciated because it generally appreciates over time.
• Buildings: Structures owned by the company for operations, storage, or administrative purposes.
• Machinery: Equipment used in the manufacturing process.
• Vehicles: Cars, trucks, and other vehicles used for business purposes.
• Furniture and Fixtures: Office furniture, shelving, and other fixtures used in the business.
• Computers and Equipment: IT equipment and other technological assets used in operations.

Accounting for Fixed Assets

1. Acquisition: Fixed assets are recorded on the balance sheet at their historical cost, which includes the purchase price and any costs necessary to prepare the asset for use (e.g., installation costs).
2. Depreciation: Fixed assets (except land) are depreciated over their useful lives. Common methods of depreciation include straight-line, declining balance, and units of production.
3. Impairment: If a fixed asset's carrying amount exceeds its recoverable amount, an impairment loss is recognized.
4. Disposal: When a fixed asset is sold, retired, or otherwise disposed of, any gain or loss on disposal is calculated as the difference between the asset's carrying amount and the proceeds from disposal.

Importance of Fixed Assets

• Operational Efficiency: Fixed assets are essential for carrying out the company's operations and generating revenue.
• Financial Stability: They represent a significant portion of a company's investment and contribute to the company's long-term financial stability.
• Collateral for Loans: Fixed assets can be used as collateral for securing loans and financing.
• Tax Implications: Depreciation of fixed assets provides tax benefits by reducing taxable income.

Fixed assets are a critical component of a company's financial health and operational capacity, making their management and accounting crucial for long-term success.