Fixed Asset

What is Fixed Asset?

Fixed asset, in accounting, is a long-term asset having lifespan > 1 financial year and value > capitalizing limit. They are typically bought to generate income. They are also known as Capital Assets and Property, Plant and Equipment (PP&E). These assets are normally not meant to sell or are not easily convertible into cash and therefore are categorized under non-current assets in the balance sheet.

Fixed Assets in Balance Sheet

A balance sheet is consisted of asset, liabilities and capital by shareholders. Further, assets are classified into current and noncurrent assets. Current assets are liquid assets which can be converted into cash within a period of one year or one financial year. Whereas, noncurrent assets include fixed assets, investments by the company etc which are not easily converted into cash. In the balance sheet, the value of fixed asset is reported after deducting accumulated depreciation. It is rare but there are chances of value being affected by impairment of revaluation.

Types of Fixed Assets with their Examples

There are two types of fixed assets viz.  Tangible Fixed Assets and Intangible Fixed Assets

Tangible Fixed Assets

Example of these assets is land, building, property, plant, equipment, computer, vehicle, machinery, etc. In short, the assets, which you can touch, are normally categorized as tangible assets.

Intangible Fixed Assets

Example of intangible fixed assets includes computer software, patent, trademark, copyright, goodwill etc.  In the similar fashion you can define intangible fixed assets as I said which you cannot touch.

Fixed Assets

Fixed Asset Accounting

In financial accounting fixed assets are treated in following three ways.

  1. Depreciation or Amortization for Tangible Assets and Intangible Assets respectively.
  2. Impairment of Asset – This is normally done when the market value of the Asset goes below the net book value of the Asset.
  3.  Selling or disposing off the Asset

Fixed Asset Depreciation

Depreciation of fixed assets is done to calculate and include cost of using fixed assets in the profit and loss statement. There are different methods of calculating depreciation – Straight Line Method, Accelerated, Double Declining Balance, and Units of Production Method. It is mandatory for corporation to report financial statement with consistent policy of depreciation and if the policy is changed it has to be reported separately. Fixed asset depreciation is a very crucial area also because the net profit shown in the financial statement is quite dependent on the method of depreciation. So, for analyst it is very important to consider this point.

Fixed Assets Turnover

Fixed asset turnover ratio is a financial metric to understand how many times the revenue is earned relative to its investment in fixed assets.

Formula

Fixed Assets Turnover Formula = Net Revenues / Net Fixed Assets

Net revenue is the revenue exclusive of the returns and taxes and Net fixed assets means fixed assets less depreciation.

Importance of Fixed Assets

Business Viability

Fixed assets are very important from the beginning. Without considering the value of fixed assets, possibility of fixed asset turnover, life of an asset, it is not possible to accurately understand viability of the business.

Fixed Asset Turnover

Once we have already invested in the fixed assets, the prime concern of the businessman to keep check on fixed asset turnover. There are plants which run 24 by 7 for producing any product. Lack of orders / sales can underutilized fixed assets or reduce fixed asset turnover and the business can fall prey to losses especially due to the cost of using the assets i.e. Depreciation.

Return on Asset

The financial health is also determined in relation to the return on assets (ROA).

Break Even

The whole concept of break even and margin of safety is dependent on fixed assets.

Entry Barrier

One of the Porter five forces talks about barriers to entry. Fixed asset is one of the prime Contender as a barrier simply because higher the investment in these assets, the bigger the amount of total investment becomes.

References:

Last updated on : December 13th, 2017
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