What Are Considered Fixed Assets? Examples & Definition
Grasp the core concept of fixed assets: what they are, their classifications, and how they are accounted for in business.
Fixed assets are long-term resources a company uses to generate income and support its operations. Unlike items purchased for immediate sale, these assets provide economic benefits over an extended period. They are the tangible and intangible tools that enable a business to produce goods, deliver services, and maintain its competitive position.
Defining Fixed Assets
Fixed assets are resources a company owns and uses in its business operations, expected to provide economic benefits for more than one year. They are not acquired for resale but are held for productive use. These assets generally represent a significant investment and are considered non-current because they are not easily converted into cash within a short period, typically one year.
These assets contribute to a business’s ability to generate revenue or reduce costs. For example, manufacturing machinery directly produces goods for sale, while office equipment supports administrative functions.
Types of Fixed Assets
Fixed assets are categorized into two main types: tangible and intangible, based on whether the asset possesses a physical form. Both types are important for a business’s long-term success and operational efficiency.
Tangible fixed assets are physical items that can be seen and touched. These assets visibly support operations and are often referred to as property, plant, and equipment (PP&E). They are recorded on the balance sheet and typically decrease in value over time with use.
Intangible fixed assets lack physical substance but provide long-term economic value. These assets derive their value from legal rights or intellectual advantages.
Common Examples of Fixed Assets
Tangible fixed assets include:
Land: Used for operations, such as building sites or agricultural purposes, and typically does not wear out.
Buildings: Offices, factories, and warehouses provide the physical space for business activities over many years.
Machinery and equipment: Manufacturing tools, production lines, and computers directly used to produce goods or deliver services.
Vehicles: Delivery trucks or company cars that facilitate business operations over their useful lives.
Furniture and fixtures: Office desks and shelving units that support the work environment for an extended period.
Intangible fixed assets include:
Patents: Grant exclusive rights to an invention, providing a competitive advantage for a set period, typically 20 years.
Copyrights: Protect original works of authorship, such as books or software, allowing the owner to control their use and distribution.
Trademarks: Symbols, words, or designs that identify a company’s products or services, playing a role in brand recognition and customer loyalty.
Goodwill: Represents the value of a company’s reputation and customer relationships, arising from business acquisitions.
Software licenses: Grant the right to use specific programs, supporting operations.
Initial Accounting for Fixed Assets
When a business acquires a fixed asset, it is recorded on financial statements following the cost principle. This means the asset is initially recorded at its historical cost, including the purchase price and all necessary expenditures to get it ready for its intended use. These additional costs can include freight charges, sales taxes, installation fees, and testing.
These expenditures are “capitalized” rather than immediately expensed. Capitalizing a cost means it is recorded as an asset on the balance sheet, reflecting its long-term benefit. This accounting treatment aligns with the matching principle, ensuring the asset’s cost is recognized over the periods it generates revenue. Rather than deducting the entire cost in the year of purchase, the cost is spread out. Businesses often establish a capitalization threshold, where costs below this amount are expensed immediately, while those above are capitalized.
Treatment Over Time
Once a fixed asset is acquired and capitalized, its cost is systematically allocated over its useful life. For tangible fixed assets, this process is known as depreciation. Depreciation reflects the gradual wear and tear, obsolescence, or consumption of the asset’s economic benefits over time.
The purpose of depreciation is to match the expense of using the asset with the revenue it helps generate over its useful life. Land is an exception, as it is generally not depreciated due to its indefinite useful life.
For intangible fixed assets, the equivalent process is called amortization. Amortization systematically reduces the asset’s value on the balance sheet over its estimated useful life.
Both depreciation and amortization are non-cash expenses, meaning they do not involve an outflow of cash. They are accounting mechanisms designed to reflect the declining value of assets and to spread their initial cost over the periods they contribute to the business. This periodic allocation impacts financial statements by reducing the asset’s book value and recognizing an expense on the income statement.