Fixed assets – What are fixed assets?
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The term 'fixed assets' refers specifically to assets that cannot be converted easily or quickly into cash. These are usually larger assets that a company uses in its operations and are considered a long-term investment for the business. They are usually listed on a company's balance sheet below the current assets.
What can be considered a fixed asset?
Fixed assets are purchased by a company and registered as a fixed asset if they are not expected to be sold or converted to cash within a year's time. These long-term assets often make up the elements of a business that can be considered more infrastructure: crucial for the business to function and produce.
They can be tangible assets such as physical property, or intangible assets, such as a copyright. Fixed assets commonly include: land owned by a company, manufacturing plants, and larger types of equipment.
Fixed assets also include any assets a company has that are not sold directly to their customers - e.g. motor vehicles, furniture, office equipment, computers, etc.
Why fixed assets are important
Thorough documentation of a company's fixed assets contribute to understanding the financial health and value of that business.
Information involving fixed assets and depreciation is also commonly used by potential investors when they are considering whether a company is a worthwhile investment.
When determining the value of a fixed asset, the method of depreciation must be taken into account.
Depreciation of fixed assets
Because the value of an asset reduces (depreciates) as it is used, as it ages, or as newer models are introduced, it is important for a business to register and track depreciation from the time of purchase.
Fixed assets are included in the balance sheet at their initial cost, and then depreciated throughout their useful life until they are sold, replaced or recorded on the balance sheet at their residual value.
The depreciation of a fixed asset is the initial cost less the residual value. It is recorded as an expense since it diminished the value of a company's total holdings.
Some fixed assets, such as land, do not depreciate because it is is not possible for them to be 'used' or 'old'.
Fixed assets and Debitoor
Debitoor's larger plans make it easy to enter a fixed asset, set, and track depreciation for the useful life of the asset. You can enter the purchase of the fixed asset as an expense, select the category it falls under, and turn on depreciation.
The system automatically applies straight-line depreciation, the most common depreciation method, and breaks it down over the number of years you enter for use of the asset in your business.