What Are Fixed Assets? Definition and Examples
Discover the foundational assets that power long-term business operations and financial stability. Understand their role in a company's sustained success.
Discover the foundational assets that power long-term business operations and financial stability. Understand their role in a company's sustained success.
Fixed assets are long-term tangible items a business owns and uses to generate income. These assets are not intended for sale to customers in the ordinary course of business. Instead, they serve as the operational foundation, supporting a company’s ability to produce goods or services over an extended period. They represent a significant investment and are fundamental to a company’s financial structure and long-term viability.
Fixed assets possess a long-term nature, expected to provide economic benefits for more than one accounting period. For instance, the Internal Revenue Service (IRS) considers an item a capital expense if it has a useful life extending beyond the current tax year.
These assets are tangible, meaning they have a physical presence. This tangibility distinguishes them from intangible assets like patents or copyrights. Fixed assets are acquired specifically for use in a business’s normal operations.
Companies often establish a capitalization policy, setting a dollar threshold above which purchases are recorded as fixed assets rather than expensed immediately. For example, the IRS suggests businesses may choose a capitalization threshold of $2,500 or $5,000, provided they use the same threshold for both accounting and tax purposes.
Land is a fixed asset used in operations, such as for a factory site, and does not depreciate over time. Buildings and structures, including offices, warehouses, or retail spaces, serve as operational hubs and are expected to last for many years.
Fixed assets are initially recorded at their acquisition cost, which includes the purchase price plus all expenditures necessary to prepare the asset for its intended use. This encompasses sales tax, shipping fees, installation costs, and certain interest expenses if the asset is constructed by the entity itself. For example, if a business buys a new machine for $100,000, and pays $5,000 for shipping and $2,000 for installation, the asset would be recorded at $107,000.
After acquisition, fixed assets are subject to depreciation, which is the systematic allocation of their cost over their estimated useful life. This accounting practice matches the expense of using the asset with the revenues it helps generate over its operational period. Depreciation recognizes that assets lose value or utility over time due to wear and tear, obsolescence, or other factors.
Accumulated depreciation is a contra-asset account. This amount reduces the asset’s original cost on the balance sheet, resulting in the asset’s “net book value” or “carrying value.” For instance, if a machine costing $100,000 has accumulated depreciation of $30,000, its net book value would be $70,000. On a company’s balance sheet, fixed assets are presented as non-current assets, often grouped under “Property, Plant, and Equipment.”
Current assets are items a company expects to convert into cash, use up, or sell within one year or one operating cycle, whichever is longer. Common examples include cash, accounts receivable (money owed by customers), and inventory.
The primary difference between these asset types lies in their time horizon and purpose. Fixed assets are long-term, held for use in operations over multiple years, while current assets are short-term, intended for quick conversion to cash or consumption. This leads to a difference in liquidity: current assets are highly liquid, whereas fixed assets are less liquid due to their long-term nature and specialized use.