What it means
A business's fixed assets are its productive base: the factory that makes the product, the trucks that deliver it, the servers that run the website, the desks its staff sit at. They are distinguished from current assets, which flow through the business within a year, and from intangible assets, which have no physical form.
The word "fixed" refers not to immobility but to permanence: the assets are held to be used, not sold. The accounting follows the asset's life.
At acquisition, cost includes everything needed to bring the asset into use: purchase price, delivery, installation, professional fees and, for self-built assets, direct labour and materials. That cost is then spread over the asset's useful life through depreciation, so that each period using the asset bears a share.
The balance sheet shows cost less accumulated depreciation, the net book value. When an asset is sold or scrapped, its cost and accumulated depreciation are removed and any difference between proceeds and net book value is a gain or loss.
Judgement enters at three points. Useful life and residual value are estimates that determine the depreciation charge; a longer life means lower annual depreciation and higher profit.
Subsequent spending must be classified: repairs that maintain the asset are expensed, improvements that extend its life or capacity are capitalised. And if an asset's recoverable amount falls below its book value because of damage, obsolescence or a change in the business, an impairment loss must be recognised.
A fixed asset register, listing every asset with its cost, location, depreciation and net book value, is a basic control. It supports the depreciation calculation, physical verification, insurance claims, tax computations and disposal decisions.
Businesses that lose track of their assets end up depreciating equipment that was scrapped years ago or failing to insure equipment they still rely on.
In practice
Real-world examples.
Example
A haulage company's fixed assets are dominated by its 60 trucks, each depreciated over six years to a residual value based on the used truck market.
Example
A software company owns almost no fixed assets beyond laptops and office furniture; its productive base is intangible and its people.
Example
A hotel group capitalises a $3 million refurbishment because it upgrades the rooms and extends the building's useful life, but expenses the $200,000 annual maintenance programme.
Think of it
“Fixed assets are like the big tools in a mechanic's shop-the lifts, diagnostic machines, and compressors that stay put and are used year after year.
Formula
Calculation
Net Book Value = Cost minus Accumulated Depreciation minus Impairment
Straight-line Depreciation = (Cost minus Residual Value) / Useful Life
Fixed Asset Turnover = Revenue / Average Net Fixed Assets
Worked example. A printing company buys a press for $400,000 plus $25,000 delivery and installation. It expects the press to run for eight years and to be sold for $45,000 at the end.
- Capitalised cost = $400,000 + $25,000 = $425,000
- Annual depreciation = ($425,000 minus $45,000) / 8 = $47,500
After three years: accumulated depreciation = $142,500; net book value = $282,500.
In year four the company spends $12,000 on routine servicing (expensed) and $60,000 on an upgrade that adds a finishing unit and extends the press's expected life by two years (capitalised). Revised cost = $485,000; remaining life is now 7 years; remaining depreciable amount = $485,000 minus $142,500 minus $45,000 = $297,500; new annual depreciation = $42,500.
At the end of year six, a new technology makes the press worth only $120,000 on the second-hand market and the company expects to earn less from it than its book value of $200,000 ($485,000 minus $142,500 minus 3 x $42,500). An impairment loss of $80,000 is recognised, reducing the book value to $120,000, and depreciation is recalculated on the new figure.
Fixed asset turnover: with revenue of $2,800,000 and average net fixed assets of $1,400,000, turnover is 2.0, meaning each dollar of fixed assets generates two dollars of sales a year.Case study
Seen in the real world.
A food manufacturer's fixed asset register had not been reconciled to the factory floor for a decade. When a new finance director ordered a physical count, the team found 140 items on the register that no longer existed, including two production lines dismantled years earlier that were still being depreciated at $180,000 a year, and 30 items in use that had never been recorded, including a $250,000 packaging machine bought by the operations director from a supplier's stock and paid for through the maintenance budget. Insurance cover had been based on the register and was $1.1 million short.
Correcting the register produced a one-off loss on the ghost assets, a small gain on the unrecorded ones, a revised insurance premium, and a depreciation charge $95,000 a year lower than before because the true asset base was younger than the register suggested. The company introduced an annual physical verification, an asset tag on every item above $1,000 and a rule that any purchase over $5,000 goes through capital expenditure approval whatever budget pays for it.
Watch out
Common mistakes.
- Expensing capital items to avoid the capital approval process, or capitalising repairs to protect profit. Both misstate the accounts.
- Setting useful lives once and never revisiting them. Lives should be reviewed when technology, usage or plans change.
- Neglecting the fixed asset register. Unrecorded, uninsured or long-gone assets are common where nobody reconciles it.
Questions
People also ask.
Is land a fixed asset?
Yes, but it is not depreciated because it does not wear out. Buildings on it are depreciated separately.
What is the difference between fixed assets and current assets?
Fixed assets are used in the business for more than a year. Current assets are converted to cash or consumed within a year.
How is a fixed asset removed from the books?
On disposal, its cost and accumulated depreciation are written out, proceeds are recorded, and the difference is a gain or loss on disposal.
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