What Items Are Included in Fixed Assets?

In accounting, resources are broadly categorized as assets, which represent economic benefits controlled by the business. Fixed assets constitute a specific and significant category of these resources, playing a fundamental role in a company’s operational capacity. These assets are distinct from those consumed quickly, as they provide lasting value to the organization.

Characteristics of Fixed Assets

Fixed assets are tangible items. This tangibility distinguishes them from intangible assets, such as patents or trademarks, which lack physical substance. A primary characteristic of fixed assets is their long-term nature, as they are expected to be used for more than one accounting period, typically exceeding one year.

Fixed assets are acquired for use in the business’s core operations, such as manufacturing goods, providing services, or for administrative purposes. They are not purchased with the intention of immediate resale to customers, unlike inventory. These assets are generally not easily converted into cash, making them relatively illiquid compared to current assets like cash or accounts receivable. Fixed assets are “capitalized” rather than immediately expensed. Capitalization involves recording the cost of the asset on the balance sheet, with its cost systematically allocated over its useful life.

Common Types of Fixed Assets

Fixed assets encompass a wide range of tangible items that support a business’s long-term operations. One prominent type is land, which includes the cost of the land itself and expenses to prepare it for its intended use, such as clearing or grading. Land is unique among fixed assets because it has an unlimited useful life and is not depreciated.

Buildings and structures represent another significant category, including offices, factories, warehouses, and other permanent constructions. These assets provide the physical space for business activities. Machinery and equipment are also common fixed assets, encompassing items like production machinery, computers, specialized tools, and office equipment used in daily operations. These items are involved in producing goods or delivering services.

Vehicles, such as company cars, trucks, or delivery vans, are used for transportation in the business and are expected to provide benefits for multiple years. Furniture and fixtures, including office desks, chairs, shelving, and display cases, are tangible items that support the work environment. Leasehold improvements are permanent alterations or additions a tenant makes to a leased property. These improvements are capitalized by the lessee if they meet specific criteria, even though they typically revert to the landlord at the lease’s end.

How Fixed Assets are Valued

The initial recorded value of a fixed asset is determined by the historical cost principle. This principle mandates that assets are recorded at their original cost, which includes not just the purchase price but all necessary expenditures to acquire the asset and get it ready for its intended use. The Internal Revenue Service (IRS) also provides guidance on capitalization, stating that an item should be capitalized if it has a useful life beyond the current tax period and is used in a trade or business.

Specific costs that are capitalized and added to the asset’s value include:

• The actual purchase price paid for the asset
• Shipping and freight costs incurred to transport the asset to the business location
• Installation costs, which cover expenses to set up or assemble the asset
• Testing costs to ensure the asset functions properly before being placed into service
• Legal fees and brokerage commissions directly related to the acquisition (for assets like land or buildings)
• Site preparation costs for land, such as the demolition of old structures, clearing, and grading
• Any non-recoverable sales taxes paid on the asset

In contrast, routine maintenance or repairs that do not extend the asset’s useful life or improve its capacity are generally expensed in the period incurred, rather than being added to the asset’s value. The IRS suggests de minimis safe harbor thresholds, often between $2,500 and $5,000 per invoice or item, below which costs may be expensed rather than capitalized.