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Table of Contents
What is a Fixed Asset?
A Fixed Asset represents a long-term tangible resource owned and used by a business for operations, not intended for resale. These assets support revenue generation and typically have a useful life exceeding one year.
Definition
A fixed asset is a long-term, physical asset used in business operations and recorded on the balance sheet at cost, depreciated over its useful life.
Table of Contents
- What is a Fixed Asset?
- Key Takeaways
- Understanding Fixed Assets
- Formula (If Applicable)
- Real-World Example
- Importance in Business or Economics
- Types or Variations
- Related Terms
- Sources and Further Reading
- Quick Reference
- Frequently Asked Questions (FAQs)
- Is land considered a fixed asset?
- What is the difference between a fixed asset and inventory?
- Can fixed assets be revalued?
Key Takeaways
- Fixed assets are long-term, tangible resources such as machinery, buildings, and vehicles.
- They are depreciated over time to reflect wear, usage, and aging.
- Critical for operational capability and long-term strategic investment.
Understanding Fixed Assets
Fixed assets form the backbone of business operations. Companies acquire them to produce goods, provide services, or support administrative functions. Unlike inventory, fixed assets are not sold in the normal course of business.
They are capitalized—recorded as assets rather than expenses—and depreciated over time. Depreciation allocates asset cost across its useful life, aligning expenses with revenue generation.
Fixed assets appear on the balance sheet under Property, Plant, and Equipment (PP&E). Their value affects financial ratios, tax liability, financing decisions, and company valuation.
Formula (If Applicable)
Net Book Value (NBV):
NBV = Cost of Asset − Accumulated Depreciation
Depreciation (Straight-Line):
Depreciation Expense = (Cost − Salvage Value) / Useful Life
Real-World Example
A manufacturing company purchasing industrial equipment worth $500,000 records it as a fixed asset. The equipment is depreciated over its 10-year useful life. This allows the company to match annual depreciation expense with the revenue the equipment helps generate.
Importance in Business or Economics
Fixed assets influence:
- Production capacity and efficiency
- Financial planning and capital expenditure budgeting
- Company valuation and borrowing capacity
- Profitability through depreciation and cost allocation
Investors monitor fixed asset turnover to assess operational efficiency.
Types or Variations
Tangible Fixed Assets: Machinery, buildings, vehicles, land.
Furniture & Fixtures: Office and administrative assets.
Leasehold Improvements: Enhancements to leased property.
Related Terms
- Depreciation
- Capital Expenditure (CapEx)
- Property, Plant, and Equipment (PP&E)
Sources and Further Reading
- Financial Accounting Standards Board (FASB): https://www.fasb.org
- IFRS Foundation – IAS 16 Property, Plant and Equipment: https://www.ifrs.org
- Corporate Finance Institute – Fixed Assets Guide: https://corporatefinanceinstitute.com
- Investopedia – Fixed Asset: https://www.investopedia.com/terms/f/fixedasset.asp
Quick Reference
- Long-term assets used in business operations.
- Depreciated to reflect usage and aging.
- Essential for production, service delivery, and operational strategy.
Frequently Asked Questions (FAQs)
Is land considered a fixed asset?
Yes, but it is not depreciated as land does not typically lose value.
What is the difference between a fixed asset and inventory?
Fixed assets support operations; inventory is held for sale.
Can fixed assets be revalued?
Under IFRS, yes. Under U.S. GAAP, revaluation is not permitted.
