Key Takeaways
- Long-term tangible assets used in operations.
- Recorded as non-current assets on balance sheet.
- Depreciated over useful life except land.
- Not easily converted to cash quickly.
What is Fixed Asset?
A fixed asset, also known as property, plant, and equipment (PP&E), is a long-term tangible asset used in business operations to generate revenue. These assets have a useful life extending beyond one year and are not intended for quick sale or conversion to cash, distinguishing them from current or illiquid assets.
Fixed assets are recorded on the balance sheet as capital investments, reflecting their role in supporting ongoing business activities and financial reporting under GAAP standards.
Key Characteristics
Fixed assets share several defining traits essential for accounting and operational purposes:
- Tangible and physical: Includes land, buildings, machinery, vehicles, and office equipment.
- Long-term use: Expected to provide economic benefits for more than one year, often several years.
- Non-liquid: Not easily converted into cash within a short period.
- Capitalized on balance sheet: Recorded as non-current assets rather than immediate expenses.
- Depreciable: Most fixed assets depreciate over time except land, following accounting conventions like the half-year convention for depreciation.
How It Works
When you acquire a fixed asset, you capitalize its cost on the balance sheet rather than expensing it immediately. This cost allocation matches the asset’s expense with the revenue it helps generate through depreciation, often calculated using methods such as straight-line or accelerated depreciation.
Depreciation reduces the asset's book value over its useful life, impacting both the income statement and balance sheet. Proper accounting for fixed assets involves tracking acquisition costs, accumulated depreciation, and any disposals or impairments to maintain accurate financial records.
Examples and Use Cases
Fixed assets are fundamental across various industries, supporting production and operations with tangible resources:
- Airlines: Companies like Delta and American Airlines depend on aircraft and ground equipment as fixed assets essential to their business.
- Manufacturing: Facilities and machinery used by automakers such as Ford and General Motors represent significant fixed asset investments.
- Retail and offices: Furniture, computers, and buildings owned by companies like Federal Realty Investment Trust are categorized as fixed assets.
Important Considerations
Accurate fixed asset management is critical for financial transparency and compliance with accounting standards like GAAP. Businesses must carefully assess asset useful life, depreciation methods, and impairment risks to avoid misstated financials.
Additionally, understanding the cost thresholds and capitalization policies helps in distinguishing between capital expenditures and operating expenses, supporting better budgeting and investment decisions, especially when planning for ongoing cost control and asset replacement.
Final Words
Fixed assets represent key investments that support your business operations over the long term and impact both your balance sheet and depreciation schedules. Review your asset register regularly to optimize use and plan for timely replacements or upgrades.
Frequently Asked Questions
A fixed asset is a long-term tangible asset used in business operations to generate revenue. These assets, like land, buildings, and machinery, have a useful life longer than one year and are not intended for quick sale.
Common fixed assets include property such as land and buildings, plant and machinery like factory equipment, vehicles used for business, and office furniture and computers. These items are used over multiple years in the business.
Fixed assets are capitalized on the balance sheet as non-current assets and not expensed immediately. Their cost is spread over their useful life through depreciation to match expenses with revenue generation.
Most fixed assets depreciate because their value declines over time due to wear and usage. Land is unique among fixed assets because it does not depreciate.
The useful life varies by asset type; for example, buildings typically last over 20 years, machinery and equipment between 3 to 10 years, and vehicles or furniture around 5 to 7 years.
When a fixed asset is sold or disposed of, it is removed from the accounting books, and any gain or loss from the sale is recognized in the financial statements.
In the US, fixed assets are governed by US GAAP standards, specifically ASC 360 for property, plant, and equipment and ASC 842 for leased assets.
An item is recorded as a fixed asset if it is tangible, used long-term (over one year), has a significant cost (often $5,000 or more), and is used in operations rather than held for quick sale.
