Fixed assets play a crucial role in a company’s finances. It is assets intended for long-term ownership or use. In accounting, these assets are distinct from current assets due to their extended useful life and are integral to a company’s day-to-day operations, aimed at generating long-term profits.
Defining fixed assets
Fixed assets are tangible items employed in business operations to generate income. They stand apart from current assets due to their longer useful life, and several attributes characterize them:
Fixed assets are characterised by the following attributes:
- Long-term utility: Fixed assets have a useful life of more than one year and are vital for a company’s day-to-day operations.
- Depreciation: Apart from real estate, fixed assets are subject to depreciation, which means wear and tear over time.
- Business use: Fixed assets are used in business operations, providing a long-term financial benefit to the company.
- Liquidity: Being non-current assets, fixed assets are not easily convertible into cash.
Examples of fixed assets
Common fixed assets include buildings, machinery, vehicles, computer equipment, and real estate. Which fixed assets are relevant will of course depend on the type of business. Most companies have some fixed assets, however some industries have more fixed assets. A construction company will typically own a lot of fixed assets.
Fixed assets on financial statements
Understanding how fixed assets are presented on financial statements is crucial for stakeholders:
- Balance sheet: Fixed assets are recorded as property, plant, and equipment (PP&E), providing insight into a company’s asset holdings.
- Income statement: Depreciation of fixed assets is reflected, impacting the net income.
- Cash flow statement: Acquisition or disposal of fixed assets is documented under investing activities.