Fixed Assets – Definition & Examples

What Are Fixed Assets?

A fixed asset is anything tangible your company owns that is used (in some way) to create revenues over the long term, with a useful life of at least one year. If you can’t touch it, or it will be used up within a year, it’s not a fixed asset. 

A fixed asset also can’t be something the company sells in the normal course of business. For example, if your company has a delivery van that it uses to make deliveries, it would count as a fixed asset; but if your company sells delivery vans, those would count as inventory, and not as fixed assets.

Fixed assets include things like: 

  • Land 
  • Buildings 
  • Vehicles 
  • Heavy machinery 
  • Computer systems 
  • Office furniture 

These assets are always valued at their historic cost for accounting purposes. Historic cost includes what your company paid for the asset, plus all delivery, taxes, and setup costs. Fixed assets are also often referred to as “property, plant, and equipment,” or PP&E.

Examples of Fixed Assets

Land 

In accounting, property refers to land and buildings. This is property you’re using in the course of business, and includes things like free-standing stores, office buildings, warehouses, factories, manufacturing plants, and the land those are built on. These fixed assets are counted as yours as long as you own them or have what’s known as a capital lease. 

In a capital lease, your company essentially owns the asset, but doesn’t actually own it. (Remember, this is just for accounting purposes.) In order to qualify, the lease has to meet at least one of a list of requirements, which includes that the lease period extends as long as 75 percent of the asset’s useful life (for example, run at least 30 years on a 40-year building), or that your company would own the asset at the end of the lease period (sort of like renting to own). 

The property category also includes major improvements and construction projects (even on property “owned” through capital leases).

Plant 

“Plant” applies mainly to companies that make something, as opposed to companies that only sell finished goods. The plant category covers the kind of fixed assets you’d find, for example, in a manufacturing facility or a bakery. In this category, you would include things like: 

  • Manufacturing machinery 
  • Assembly line equipment
  • Ovens and walk-in freezers 
  • Drill presses and lathes 
  • Textile machinery 

Anything the company uses to create or transform goods fits under the plant umbrella. 

Equipment 

All the fixed assets that don’t fit into the property and plant categories fall under the equipment group. This type of equipment includes things like forklifts, delivery vans, display cases, office furniture, and computer systems. These assets keep the business running, and are used in support of the business in activities like attracting customers and creating sales (as opposed to literally creating items for the business to sell). 

Most small businesses’ fixed assets fit into this category. Even businesses that do make products will also have this type of equipment in use. Even if your business fits into that one-man show mold (at least for now), any physical asset you’re using to help bring in customers and generate sales will show up in the fixed assets section of the company balance sheet.

Accounting For Fixed Assets 

Fixed assets take more work than other assets, from both a real-life maintenance perspective and from the accounting viewpoint. The more substantial fixed assets, from heavy machinery to factories, can require a lot of planning (like determining the best location, getting facilities up and running, and making sure personnel have the right training) and drawn-out purchase arrangements (such as long-term leases and mortgages). Moreover, they bear the burden of being long-term liabilities to the business. 

Since so much can go into fixed assets, there are a lot of guidelines to help you deal with them for accounting purposes. Some of the guidelines come from the IRS, and you may have to use them when you do your business tax return. Others come from GAAP (Generally Accepted Accounting Principles). 

The combined rules cover everything from what to include in the price of your asset to the method of calculating depreciation to how to record the bookkeeping entry when you eventually dispose of the asset. It sounds like a lot, but broken down, these rules are really pretty straightforward.

Calculating Fixed Asset Costs 

For the more basic fixed assets, such as file cabinets, desks, and chairs, the costs are easy to determine. When you start adding in things such as down payments and trade discounts, as you would with a fleet vehicle, for instance, the accounting gets just a little trickier. The basics, though, are the same for every fixed asset you have. 

The accounting rule here is called the cost principle, which means that you will value your fixed assets based on what you paid for them, never based on their market value (or how much they are “really” worth). 

That cost, though, includes absolutely everything you had to pay to get that asset ready for work. Of course, there’s the price tag of the asset itself, but you add to that things such as sales tax, delivery charges, installation, setup fees, and training on how to use the asset (common with new equipment).

By the Numbers 

Let’s say your company needs a local computer network installed before you can get your business up and running. The system itself costs $30,000 for all the hard- ware and software. The installation and network management training tacks on another $6,500 to your bill. The computer company offers you a 5 percent discount on the system if you’ll sign a one-year service contract for $1,500, which you do. 

There’s 6 percent sales tax on the system and a $300 delivery charge. Before you can take delivery, though, you have to set up a climate-controlled room to house your server, and that costs $5,000. You pay a cash deposit of $500 on the room setup, another cash deposit of $3,000 on the computer system, the full price of the service contract, and the rest is payable over three years. 

All of those costs—except for the service contract—go into the accounting cost of your computer system asset. That makes your asset value equal to $42,010. The system is $30,000 less a 5 percent discount, bringing it to $28,500. Sales tax (at 6 percent) on that comes to $1,710. You also add on the $6,500 setup fee, the $300 delivery charge, and the $5,000 for the climate-controlled room.

A Word About Depreciation 

Any conversation about fixed assets would be incomplete without a nod to depreciation. Depreciation is an accounting construct designed to capture a virtual decline in value of the asset as it gets used over time. That doesn’t mean the asset necessarily loses actual value—some assets don’t, and some may even become more valuable over time despite ongoing wear and tear. But for accounting and tax purposes, assets get used up, and that is measured in terms of periodic depreciation expense. 

The asset, or rather contra asset, account to hold all of the depreciation attached to fixed assets over time is called accumulated depreciation. Accumulated depreciation is known as a contra account because even though it fits in the asset category, where accounts are supposed to have debit balances, this account carries a credit balance. That credit balance is used to offset the value of the fixed assets. 

Here’s an example: Say your company has a single fixed asset that was originally worth $10,000, and you’ve had it for four years. Your accountant takes $1,000 in depreciation expense every year. So at the end of four years, the accumulated depreciation would be $4,000. Now, the net accounting value of your fixed asset would be $6,000, the original $10,000 cost less the $4,000 accumulated depreciation.

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