What is Fixed Asset?
As per the fixed assets definition, any tangible property or equipment that a firm uses for its income-generating operation can be categorised as this asset.
Such resources cannot be readily converted into cash or cash equivalent. Further, they cannot be exhausted or sold easily in a given accounting year.
Typically, real estate, trademarks, patents, machinery, delivery vehicle, stock, operational equipment, etc. are among the most common fixed assets examples.
Types of Fixed Asset
There are mainly two types of fixed assets. Let’s take a quick look at them -
Tangible Assets
The said fixed asset comprises resources which have a physical form. Notably, most resources falling under this category are subjected to depreciation. For example, buildings, machinery and inventory are among the most popular tangible fixed assets.
Intangible Assets
This category of fixed assets consists of those resources which do not have a physical form. It must be noted that the calculation of intangible assets is comparatively more challenging than tangible assets. For instance, it is quite difficult to quantify a company’s current brand image in terms of money. Some of the common examples of intangible assets include copyrights, patents, goodwill, brand image, etc.
Test your skill: which fixed assets’ value would be easier to calculate in a financial year?
Factory building
b. Company’s market goodwill
Importance of Fixed Asset
Fixed assets are considered to be an integral part of fixed capital-oriented firms which rely heavily on plant, property and manufacturing equipment.
Let’s find out the reasons which make fixed assets so important in a business setup.
They help to calculate a company’s net value in a financial year.
Aid in the process of income generation.
Form a significant share of an organisation’s total assets serving as a potent source of money.
The cost of fixed assets tends to influence a firm’s auditing and accounting endeavours.
Fixed asset accounting helps investors decide whether a firm is profitable enough for investment or not.
The durability of fixed assets also influences a firm’s frequent demand for workforce and other resources.
Enable formulation of an accurate financial report by facilitating financial analysis.
Regardless of its important role, fixed assets also have its share of flaws. For example, depreciation and difference in valuation leading to fluctuating fixed asset accounting are among the most common flaws of this asset class. Find out more about the shortcomings of fixed assets from our learning App!
Fixed Assets and Depreciation
Durability is a significant feature of fixed assets. However, with prolonged use, such resources begin to depreciate as the assets begin to degrade in terms of efficiency and productivity. Generally, factors like acquisition cost, salvage value and shelf life or economic life affect the depreciation value of fixed assets.
Such values directly influence fixed asset accounting valuation in a company’s balance sheet. Several methods can be used to calculate the depreciation value of fixed assets. However, the Straight Line Method and the Written Down Value method are the most widely used methods of calculating the depreciation of fixed assets.
Which of the two methods do you normally apply to calculate the depreciation value?
Fixed Asset Accounting
Fixed asset accounting treatment is given due importance in accounting as it is an integral component for evaluating a firm’s worth, sales and revenue. A firm’s fixed assets are reported in its balance sheet under the non-current asset section and are described as plant, property and equipment (PPE).
Notably, all fixed assets except land would depreciate in their value. The total value of depreciation by the end of a financial year is reported under the fixed assets list section of PPE.
Fixed Asset and Accounting Ratio
This ratio serves as a measure of the efficiency with which a company uses its real property and other facilities. It is also known as the fixed asset turnover ratio, and it helps to measure a company’s ability to repay its debt and other financial obligations through its share of fixed assets.
Typically, the fixed asset coverage ratio shows the relationship between a company’s fixed assets’ and net sales. Mostly, a company with a higher FARC is preferred over others. It also tends to have a favourable impact on a firm’s future earnings and valuation of its corporate stocks. Here’s how the fixed asset coverage ratio formula is expressed -
FARC = (Net sales) / (Current average value of fixed assets)
Fixed Asset versus Liquid Assets
Check out the table below to find out the differences between fixed assets and liquid assets –
These topics cover the fundamentals of fixed assets accounting and offer a fair idea about it. However, if you wish to gain in-depth knowledge about the various aspects of fixed assets, you can refer to Vedantu App and browse through related topics.
Similarly, join Vedantu’s online classes and strengthen your grasp of the subject in a much effective way.
FAQs on Fixed Assets: Definition, Examples, and Accounting
1. What are fixed assets in accounting, with some common examples?
In accounting, fixed assets (also known as non-current assets or Property, Plant, and Equipment) are long-term tangible or intangible resources owned by a business. They are used to produce goods or services and are not intended for sale within one accounting period. Common examples include land, buildings, machinery, vehicles, furniture, and patents.
2. What are the main types of fixed assets recognised in business?
Fixed assets are primarily categorised into two main types based on their physical existence:
- Tangible Fixed Assets: These are assets that have a physical form and can be touched. Examples include machinery, office buildings, company vehicles, and computer hardware.
- Intangible Fixed Assets: These are non-physical assets that hold significant value for the business. Examples include patents, copyrights, trademarks, and goodwill.
3. What is the key difference between Fixed Assets and Current Assets?
The key difference lies in their liquidity and purpose. Fixed assets are held for long-term use (more than one year) to help generate revenue and are not easily converted to cash. Examples are buildings and machinery. In contrast, current assets are expected to be converted into cash or used up within one year or the operating cycle. Examples include cash, inventory, and accounts receivable.
4. How are fixed assets presented on a company's Balance Sheet?
On a Balance Sheet, fixed assets are listed under the 'Non-Current Assets' section. They are typically recorded at their original cost, and the accumulated depreciation to date is subtracted to arrive at their Net Book Value. The presentation usually follows the formula: Gross Value of Fixed Asset - Accumulated Depreciation = Net Book Value of Fixed Asset.
5. Why is depreciation charged only on fixed assets?
Depreciation is an accounting method used to allocate the cost of a tangible fixed asset over its useful life. It is charged on fixed assets because they lose value over time due to wear and tear, usage, or becoming outdated (obsolescence). The purpose is to match the cost of the asset with the revenues it helps to generate over several years. Current assets like cash do not lose value in this manner, and inventory is valued at cost or market price, whichever is lower, not depreciated.
6. What is the role of Accounting Standard (AS) 10 in the accounting for fixed assets?
As per the Indian accounting framework, Accounting Standard (AS) 10, 'Property, Plant and Equipment', prescribes the definitive accounting treatment for most fixed assets. Its primary role is to ensure uniformity and transparency in how companies recognise, measure, depreciate, and disclose their fixed assets. It provides rules on determining an asset's cost, calculating depreciation, and handling revaluations or disposals, ensuring financial statements are comparable and reliable.
7. How do you calculate the Net Book Value of a fixed asset?
The Net Book Value (NBV) of a fixed asset is calculated by subtracting the total accumulated depreciation from the asset's original cost. The formula is:
Net Book Value = Original Cost of the Asset – Accumulated Depreciation.
The 'Original Cost' includes the purchase price and any costs directly attributable to bringing the asset to its working condition, such as installation or freight charges.
8. Is land considered a depreciable fixed asset?
No, land is a unique fixed asset that is not depreciated. This is because land is considered to have an unlimited useful life and does not get 'used up' or suffer from wear and tear in the same way that buildings or machinery do. While buildings constructed on the land are depreciated over their useful life, the land itself is carried on the balance sheet at its original cost indefinitely, unless it is impaired.
