Every company has fixed assets, from the computers used by employees to the office they’re based in, but what makes these different to the other types of assets like current, non-current and long-term assets? Find out more with our simple guide.
Fixed asset definition
A fixed asset is an item that brings value to a company, whether by helping generate revenue like machinery or adding value, i.e., land or buildings. They are “fixed” because they are essential to operations, and therefore will not be sold or depleted within the current accounting year. That means a fixed asset is not a current asset, as current assets can be liquidated within an accounting year in order to generate cash.
What are fixed assets – are they non-current assets?
Fixed assets are a type of non-current asset.
Fixed assets are also referred to as property, plant, and equipment (PP&E). In other words, fixed assets are tangible non-current assets such as machinery, buildings, vehicles, furniture, and land.
Fixed assets are difficult for a company to liquidate. However, in times of financial difficulty, PP&E can be used as collateral for a business loan. PP&E depreciates over the course of its lifespan, with the exception of land, which is expected to appreciate and should be reported at its most up-to-date market value.
Intangible assets, like patents and intellectual property, also count as non-current assets. However, they are not categorized under PP&E because they are not tangible. As such, looking at PP&E or fixed assets alone will not accurately reflect a business’s entire value, as it doesn’t take into consideration things like trademarks and other non-tangible items. If a company is acquiring more fixed assets, whether they’re tangible or intangible, they may be viewed more favorably by investors, as it suggests long-term growth.
What are net fixed assets?
Net fixed assets are the total purchase price of all a company’s fixed assets, with total depreciation subtracted from that total. The following formula can be used to find this number:
Total Fixed Assets – Accumulated Depreciation = Net Fixed Assets
This formula can be developed by removing all liabilities, which means that the final figure has discounted all financial obligations (such as debt) to better reflect what the company owns:
(Total Fixed Asset Purchase Price + Improvements) – (Accumulated Depreciation + Fixed Asset Liabilities)
Fixed asset accounting for depleted assets
Fixed asset accounting requires specific entries on the balance sheet. When a fixed asset is no longer usable by a company (say, a car that is no longer sufficient for business needs), it can be sold on. The asset can only be sold at its estimated value after depreciation. In some cases, this value is so low that a company doesn’t seek a sale at all. In these cases, once the fixed asset is no longer being used it can be written off the balance sheet.
Can fixed assets be sold?
Fixed assets are defined as essential to company operations and services in order to generate revenue, so an asset cannot be acquired with the intention of investment or to be sold on. If any asset falls into the category of PP&E but is intended to be sold, such as a car dealership purchasing vehicles, then it will need to be recorded as inventory, not as a fixed asset.
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