What Are Fixed Assets? Key Characteristics & Examples

Fixed assets are a fundamental component of a business’s financial structure, representing long-term investments that support ongoing operations. These assets are not acquired for immediate resale but are instead utilized over an extended period to generate revenue and facilitate business activities.

Key Characteristics

Primarily, fixed assets are characterized by their long-term nature, meaning they are expected to be used for more than one accounting period, typically exceeding a year. This long-term utility allows businesses to spread the cost of these assets over their useful life, reflecting their contribution to revenue generation over time. Another characteristic is their operational purpose; fixed assets are used in the production of goods or services, or for administrative functions, rather than being held for sale to customers. While most fixed assets are tangible, such as buildings or machinery, some intangible assets like patents or copyrights can also be categorized similarly if they provide long-term operational benefits. Fixed assets also typically represent a significant investment for a business, often requiring substantial capital outlay at the time of acquisition.

Common Examples

Land, for instance, is a prominent fixed asset, often serving as the foundation for business premises. Unlike most other fixed assets, land is generally not depreciated because it is considered to have an unlimited useful life. Buildings, including offices, factories, and warehouses, represent another significant category of fixed assets, providing the physical space necessary for business activities.

Machinery and equipment, such as production tools, manufacturing equipment, and office computers, are also common examples, playing a direct role in daily operations. Vehicles, like company cars, delivery trucks, and vans, are fixed assets that facilitate transportation and logistics. Additionally, furniture and fixtures, such as office desks, chairs, and display cases, are included as they support the operational environment. Beyond these tangible items, certain intangible assets like patents, trademarks, and software, which provide long-term economic benefits or competitive advantages, are also considered fixed assets.

Fixed Assets Versus Current Assets

The primary difference lies in their purpose and expected duration of use. Fixed assets are acquired for long-term use in business operations, typically over a period exceeding one year. In contrast, current assets are intended for short-term use, conversion into cash, or consumption within one operating cycle, which is usually within one year. Liquidity is another key differentiator; current assets, such as cash, accounts receivable (money owed to the business), and inventory, are highly liquid and can be readily converted into cash. Fixed assets, conversely, are generally illiquid, meaning they cannot be quickly or easily converted to cash without disrupting business operations. This distinction impacts financial analysis, as current assets provide insight into a company’s short-term solvency, while fixed assets reflect its long-term operational capacity.

Basic Accounting Principles

Under the cost principle, fixed assets are initially recorded on a company’s balance sheet at their historical cost. This cost includes the purchase price along with all necessary expenditures incurred to acquire the asset and prepare it for its intended use, such as sales taxes, freight, and installation costs. Most fixed assets, excluding land, undergo a process called depreciation. Depreciation systematically allocates the asset’s historical cost over its estimated useful life, reflecting the gradual wear and tear or obsolescence the asset experiences over time. The Internal Revenue Service (IRS) provides guidelines for estimating useful lives for various asset types for tax purposes, though a company’s internal estimate for financial reporting may differ. Depreciation is recognized as an expense on the income statement, reducing the asset’s book value on the balance sheet and aligning the expense with the revenue generated by the asset’s use.