What are fixed assets?

Definition of Fixed Assets

Fixed assets are long-term tangible assets that are used for more than a year to produce goods and/or services. Fixed assets include long-term or non-current assets, as they are not actively for sale and cannot be quickly converted to cash at a low cost. The cost can be represented by the loss of value between the purchase price and the sale price. Fixed assets are items that a company owns and enables it to operate the business, such as tools, equipment, and furniture.

How Fixed Assets Work

From an accounting perspective, fixed assets are relatively straightforward. Farmers need tractors, landscapers need trucks, and as discussed above, restaurants need ovens. Most businesses, regardless of their size, require a certain amount of fixed assets to operate.

Capital

A company can choose capital to purchase fixed assets by recording items as fixed assets and deducting a portion of their cost over their useful life. Capital means that the item is recorded as a long-term asset rather than an expense. According to generally accepted accounting principles, known as GAAP, the item must be owned by the company and have a useful life of more than one year.

Depreciation

Depreciation is calculated for the natural wear and tear that the item undergoes during normal business operations and is spread out over the life of the item. Depreciation begins one month after the fixed asset is placed into service and continues until the item is fully depreciated or disposed of either through salvage or sale. Depreciation is deducted from gross profit on the income statement, reducing the total taxable income of the company.

Types of Fixed Assets

There are many types of fixed assets, depending on the type of business. Fixed assets are usually tangible assets that are not traded for cash or consumed as part of the business’s core operations. Some examples can include:

• Land (however, land cannot be depreciated)
• Buildings
• Improvements to leased properties
• Equipment
• Tools
• Vehicles
• Office furniture or other property
• Computers, servers, and security systems

Key Takeaways

Fixed assets are tangible assets that a company acquires for operation, often referred to as capital assets or fixed assets or equipment. Business owners can record the purchase of an item as a fixed asset rather than an expense, referred to as capital. After one month of placing the item into use, business owners can begin deducting depreciation for the estimated life of the item. Depreciation is deducted from gross profit on the income statement.

Source: https://www.thebalancemoney.com/what-are-fixed-assets-5204834