What Is Considered a Fixed Asset for a Business?

Fixed assets are a fundamental part of any business, representing significant investments that support long-term operations. They differ from other types of assets due to their purpose and expected duration of use within a business.

Defining Fixed Assets

Fixed assets are long-term resources a business owns and uses to generate income. They are not intended for immediate sale to customers. Instead, these assets provide financial benefits over an extended period. On a company’s balance sheet, fixed assets are typically reported under the category of “property, plant, and equipment” (PP&E). This classification highlights their role as foundational elements of a business’s operational capacity. When a company acquires a fixed asset, the cost is recorded on the balance sheet as an asset, rather than being expensed immediately. This accounting treatment reflects that the asset will contribute to revenue generation over multiple years. The value of these assets is systematically reduced over their useful lives through a process called depreciation.

Key Characteristics

Fixed assets possess distinct characteristics that set them apart from other asset categories. They typically have a useful life exceeding one year, providing long-term financial benefits to the business. These assets are actively used in the business’s operations to produce goods, provide services, or for administrative purposes, rather than being held for speculative investment. Fixed assets are generally considered illiquid, meaning they cannot be easily or quickly converted into cash without potentially disrupting business operations. With the exception of land, which typically does not lose value, fixed assets are subject to depreciation, accounting for their wear and tear or obsolescence over time.

Common Types of Fixed Assets

Fixed assets can broadly be categorized into tangible and intangible types, each serving distinct roles in a business. Tangible fixed assets are physical items that can be seen and touched, forming the physical infrastructure of a company. Common examples include land, which is unique because it generally does not depreciate, and buildings such as offices, warehouses, or factory facilities. Machinery and equipment, ranging from manufacturing tools to specialized industrial machines, are also common tangible fixed assets. Vehicles like company cars, trucks, or delivery vans are included, as is office furniture such as desks and filing cabinets. Intangible fixed assets, conversely, lack physical substance but still provide long-term economic benefits to a business. These often relate to intellectual property and legal rights. Examples include patents, which grant exclusive rights to an invention, and copyrights, protecting original creative works. Trademarks, which identify and distinguish goods or services, and goodwill, representing the value of a company’s reputation and customer relations, are also intangible fixed assets.

Fixed Assets vs. Other Asset Categories

Distinguishing fixed assets from other asset categories, particularly current assets, is essential for understanding a company’s financial health. Fixed assets are held for long-term operational use, while current assets are expected to be converted into cash, consumed, or sold within one year or one operating cycle. Liquidity is another key differentiator; current assets like cash, accounts receivable, and inventory are highly liquid and readily convertible to cash. In contrast, fixed assets are not easily liquidated without impacting business operations. Furthermore, fixed assets, with the exception of land, are subject to depreciation. Current assets, due to their short-term nature, are not depreciated.