What Are Fixed Assets on a Balance Sheet?
Understand the core long-term assets shaping a company's operational capacity. Discover how these essential items are valued and presented in financial reports.
A balance sheet provides a financial snapshot of a company at a specific moment in time. It organizes what a company owns, what it owes, and the ownership stake of its shareholders. This financial statement offers insight into a company’s health and structure, helping investors, creditors, and other stakeholders understand its financial position.
Defining Fixed Assets
Fixed assets are tangible items a business owns and uses in its operations for an extended period, longer than one year or one operating cycle. These physical assets are distinct from intangible assets like patents or copyrights. Their primary purpose is to help generate revenue through their use in the business, rather than being held for immediate sale.
Examples of fixed assets include land, buildings, machinery, equipment, vehicles, and furniture. A manufacturing company might own a factory building, production machinery, and delivery trucks. Land is a unique fixed asset because it does not depreciate over time.
Fixed assets are distinct from current assets, which are short-term resources expected to be converted into cash, consumed, or used up within one year or one operating cycle. Current assets include items like cash, accounts receivable (money owed by customers), and inventory. The key difference lies in their intended use and liquidity; current assets are designed for short-term operations and quick conversion to cash, while fixed assets are long-term investments supporting the ongoing business infrastructure.
The long-term nature of fixed assets means they are not easily converted into cash without disrupting business operations. Their acquisition represents a significant capital investment, reflecting a company’s commitment to long-term operational capacity. Understanding these assets helps stakeholders gauge a company’s physical infrastructure and its ability to sustain operations over time.
Accounting for Fixed Assets
Accounting for fixed assets begins with their initial recording, following the historical cost principle. This principle dictates that assets are recorded at their original cost, including the purchase price and all expenditures necessary to get the asset ready for its intended use. These expenditures can encompass shipping costs, installation fees, testing expenses, and modifications. For example, a $100,000 machine with $5,000 shipping and $3,000 installation would be recorded at $108,000.
After initial recording, most fixed assets, except land, undergo depreciation. Depreciation is the systematic allocation of an asset’s cost over its estimated useful life. This accounting process recognizes that assets wear out, become obsolete, or lose value over time as they are used to generate revenue. By spreading the cost over the asset’s useful life, businesses can match the expense of using the asset with the revenues it helps produce, adhering to the matching principle in accounting.
The Internal Revenue Service (IRS) outlines specific rules for depreciation in IRS Publication 946. One common method is the straight-line method, which allocates an equal amount of depreciation expense to each period over the asset’s useful life. For example, an asset costing $100,000 with a $10,000 salvage value and a 5-year useful life would incur $18,000 in annual depreciation expense (($100,000 – $10,000) / 5 years).
Accumulated depreciation is a contra-asset account that accumulates the total depreciation expense recognized on an asset since its acquisition. This account reduces the original cost of the asset to arrive at its net book value. Recording depreciation expense ensures the balance sheet reflects the asset’s remaining utility to the business.
Presentation on the Balance Sheet
Fixed assets are displayed on a company’s balance sheet under the “Non-Current Assets” section. This categorization signifies their long-term nature and their role in supporting ongoing business operations rather than being quickly converted into cash. Within this section, fixed assets are grouped under the collective heading of “Property, Plant, and Equipment (PP&E).”
The presentation of PP&E shows the assets at their gross historical cost. Accumulated depreciation is then reported as a subtraction. The difference between the gross historical cost and the accumulated depreciation results in the asset’s net book value, also known as its carrying value. For instance, a balance sheet might show “Buildings and Equipment (at cost)” at $5,000,000, “Less: Accumulated Depreciation” at $1,500,000, leading to a “Net Buildings and Equipment” of $3,500,000.
The net book value represents the portion of the asset’s cost that has not yet been expensed through depreciation. This figure provides users with insight into the remaining unallocated cost of the assets that will be recognized as expense in future periods. It is not intended to reflect the current market value of the assets, but rather their value from an accounting perspective based on their original cost and systematic allocation.
The fixed asset section of a balance sheet offers external users, such as investors and creditors, insight into a company’s long-term investment strategy and operational capacity. A significant investment in PP&E can indicate a company’s commitment to growth, expansion, or technological advancement. Analyzing these figures helps stakeholders assess the company’s capital structure and its ability to generate future revenues through its productive assets.