Fixed Asset | Definition, Types, Examples, Formula, Accounting, Importance & Limitations

Have you ever walked into a business and wondered about the things they own that keep them running? From the gleaming machinery in a factory to the computers in your local library, these are all examples of fixed assets. But what exactly are fixed assets, and why are they so crucial for businesses?

What Are Fixed Assets?

Fixed assets, also known as tangible assets or property, plant, and equipment (PP&E), are long-term resources owned by a company that are used in its operations to generate income. Unlike inventory, which is intended for sale, fixed assets are not meant for resale. Instead, they play a key role in the day-to-day functioning of the business.

Fixed Assets Examples List

Here's a comprehensive list or types of fixed assets that businesses commonly use:

1) Tangible Fixed Assets:

• Buildings: Imagine the cozy café you frequent or the towering office building where you work. These structures are essential for housing operations and welcoming customers.
• Machinery and Equipment: Think about the intricate machines that create your favorite snacks or the high-tech equipment in a car manufacturing plant.
• Vehicles: Whether it’s the delivery truck bringing your online orders or the company car used for meetings, vehicles help businesses stay connected and efficient.
• Furniture and Fixtures: Those comfy chairs in your favorite restaurant or the sturdy desks in an office are more than just furniture—they’re vital parts of the business environment.
• Land: Picture the sprawling campus of a tech company or the peaceful green space surrounding a factory. Land provides the foundation for future growth and expansion.
• Computers and Electronics: From the laptops you work on to the printers and servers keeping everything running smoothly, electronics are crucial for modern business operations.
• Leasehold Improvements: Ever notice the chic interior design of a trendy store or the custom lighting in a restaurant? These enhancements make rented spaces feel unique and inviting.
• Infrastructure: Roads, bridges, and other infrastructure projects are the backbone of businesses, ensuring goods and services can reach their destinations.

2) Intangible Fixed Assets:

• Patents: These are like the secret recipes of the business world, protecting unique inventions and ideas that give companies a competitive edge.
• Trademarks: Recognize that iconic logo or catchy slogan? Trademarks help businesses stand out and build brand loyalty.
• Copyrights: From bestselling novels to hit songs, copyrights protect the creative works that entertain and inspire us.
• Goodwill: This intangible asset is all about the warm feelings and trust customers have in a brand, often built over years of positive experiences.

3) Specialized Fixed Assets:

• Medical Equipment: In hospitals, equipment like MRI machines and X-ray devices are crucial for diagnosing and treating patients.
• Agricultural Equipment: Think about the tractors and plows working tirelessly to grow the food we eat every day.
• Telecommunication Equipment: Those towering cell towers and extensive cable networks keep us connected to the world and each other.
• Hospitality Assets: From the elegant furniture in a hotel lobby to the industrial kitchen equipment in a bustling restaurant, these assets make guests feel at home.
• Construction Equipment: The cranes and bulldozers at a construction site are the workhorses that bring new buildings and infrastructure to life.

4) Renewable Energy Assets:

• Solar Panels: Harnessing the power of the sun, solar panels are helping businesses and homes become more eco-friendly and sustainable.
• Wind Turbines: These giant spinning structures capture the energy of the wind to generate electricity, reducing our reliance on fossil fuels.
• Hydroelectric Equipment: By converting the flow of water into energy, hydroelectric equipment powers homes and industries with clean, renewable energy.

Fixed Asset Formula

Here’s a breakdown of the fixed asset formula:

Calculating the Net Book Value of Fixed Assets

The net book value (NBV) of a fixed asset is the value at which it is carried on a company's balance sheet. It accounts for the original cost of the asset minus any accumulated depreciation. Here’s how you can calculate it:

Formula

To find the net book value of a fixed asset, we use this straightforward formula:

Net Book Value (NBV) = Cost of Fixed Asset − Accumulated Depreciation

Let’s dive into what each part of this formula means:

Breaking It Down

Cost of Fixed Asset: Imagine this as the sticker price you paid when you first bought something big, like a car or a piece of machinery. It includes everything you spent to get it ready for use, from delivery charges to installation fees.

Accumulated Depreciation: Over time, just like a car loses its new-car smell, assets lose value because of wear and tear. Accumulated depreciation is the total amount of value the asset has lost since you started using it.

Example Calculation

Let’s walk through an example to see how the formula works in practice:

Imagine a company purchased a piece of machinery for $100,000. The machine is expected to have a useful life of 10 years, and it uses straight-line depreciation (where the same amount is depreciated each year).

Initial Cost of the Asset: $100,000

Annual Depreciation: If the asset depreciates evenly over 10 years, the annual depreciation would be calculated as follows:

                                      Cost of Fixed Asset​      100,000

Annual Depreciation = ------------------------- = ----------- = 10,000

                                            Useful Life                 10

Accumulated Depreciation After 3 Years:

$\text{Accumulated Depreciation }= \text{Annual Depreciation }\times \text{Number of Years }= 10,\mathrm{000 }\times \mathrm{3 }= 30,000$

Net Book Value After 3 Years:

$\text{NBV }= \text{Cost of Fixed Asset }- \text{Accumulated Depreciation }= 100,\mathrm{000 }- 30,\mathrm{000 }= 70,000$

After three years, the net book value of the machinery would be $70,000.

Accounting for Fixed Assets

How do businesses keep track of these valuable resources? Let’s break down the steps involved in accounting for fixed assets.

The Fixed Asset Lifecycle: From Purchase to Farewell

1) Acquisition:

The journey of a fixed asset begins when a business acquires it. This step involves recording the purchase and all related costs to prepare the asset for use.

Purchase Price: The initial cost of the asset, including any taxes, shipping fees, and installation costs.

Additional Costs: Expenses necessary to bring the asset to its intended use, such as legal fees, delivery charges, and site preparation costs.

Journal Entry Example:

• Debit: Fixed Asset Account (e.g., Machinery) for the total acquisition cost
• Credit: Cash/Accounts Payable for the same amount

2) Depreciation:

Over time, fixed assets lose value due to wear and tear, usage, or obsolescence. Depreciation is the process of spreading out the cost of the asset over its useful life.

Depreciation Methods: There are several ways to calculate depreciation, but the most common is the straight-line method, where the asset loses the same amount of value each year.

Straight-Line Method Formula:

                                      Cost of Fixed Asset − Salvage Value​

Annual Depreciation = ---------------------------------------------

                                                        Useful Life

​

Journal Entry Example:

• Debit: Depreciation Expense Account
• Credit: Accumulated Depreciation Account

3) Impairment:

Sometimes, an asset's value drops significantly due to unforeseen circumstances, such as damage or changes in market conditions. Impairment occurs when the asset's carrying value exceeds its recoverable amount.

Impairment Loss: Calculated as the difference between the asset's carrying amount and its recoverable amount.

Journal Entry Example:

• Debit: Impairment Loss Account
• Credit: Fixed Asset Account

4) Disposal:

When an asset reaches the end of its useful life or is no longer needed, it's either sold, scrapped, or retired. Disposal involves removing the asset from the company’s balance sheet.

Sale of Asset: If sold, any gain or loss is calculated by comparing the sale price to the asset's book value.

Journal Entry Example for Sale:

• Debit: Cash (for the amount received)
• Debit: Accumulated Depreciation Account
• Credit: Fixed Asset Account
• Credit/Debit: Gain/Loss on Sale of Asset Account

How Are Fixed Assets Managed?

Managing fixed assets is all about keeping things running smoothly and efficiently. Here’s how businesses do it:

• Asset Tracking: Companies use asset management software to keep tabs on the location, condition, and depreciation of their assets. This helps in making smart decisions about maintenance and replacements.
• Regular Maintenance: Just like a car needs oil changes, assets require regular maintenance to stay in top shape. This helps prevent breakdowns and extends their useful life.
• Periodic Valuation: Businesses regularly assess the value of their fixed assets to ensure their financial statements reflect the true worth of these resources.
• Disposal and Replacement: When an asset reaches the end of its useful life, businesses must decide whether to replace it or let it go. This decision depends on maintenance costs, efficiency, and new technology.

Importance of Fixed Assets

1. Core of Operations: Fixed assets are like the essential tools in your toolbox—they’re what keep the business running day-to-day, from machinery in a factory to the furniture in your office.
2. Long-Term Value: Investing in fixed assets is like planting seeds for future growth. They’re long-term investments that help a business build a solid foundation for years to come.
3. Boosts Revenue: They help crank up production and efficiency, making it possible for businesses to generate more revenue and profits.
4. Managing Wear and Tear: Knowing how fixed assets depreciate helps businesses plan for the future, ensuring they can replace or upgrade equipment when needed.
5. Clear Financial Picture: Properly accounting for fixed assets gives a clear view of what a company owns and its value, which is crucial for making smart business decisions and attracting investors.
6. Tax Perks: Depreciating assets can also be a tax advantage, helping to lower taxable income and keep more cash in the business.

Limitations of Fixed Assets

1. Depreciation: Just like a new car loses value as soon as you drive it off the lot, fixed assets lose value over time, which can impact your bottom line.
2. Ongoing Maintenance: Keeping everything in tip-top shape often means spending money on repairs and maintenance, which can add up.
3. Less Flexibility: Unlike cash or stocks, fixed assets are not easily converted into cash and can’t be moved around quickly if your needs change.
4. Risk of Obsolescence: As technology advances, yesterday’s cutting-edge equipment can become outdated, forcing you to invest in the latest and greatest.
5. High Upfront Costs: Buying fixed assets often requires a big chunk of cash, which can be a challenge for new or small businesses.
6. Space Needs: Physical assets take up space, so you’ll need to manage and maintain areas for storage and use, adding to operational costs.

Conclusion:

Fixed assets are more than just numbers on a balance sheet. They’re the vital components that help businesses thrive and grow. By understanding and managing these assets effectively, companies can not only maintain stability but also seize new opportunities for innovation and expansion.