What is a ‘Fixed Asset’
A fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year’s time. Fixed assets are sometimes collectively referred to as “plant.”
To learn more about asset classes, check out What is the difference between tangible and intangible assets?
BREAKING DOWN ‘Fixed Asset’
Buildings, real estate, equipment and furniture are good examples of fixed assets.
Generally, intangible long-term assets such as trademarks and patents can also be categorized as fixed assets, and more specifically referred to as fixed intangible assets.
A fixed asset is bought for production or supply of goods or services, for rental to third parties, or for use in the organization. Also called property, plant and equipment (PP&E), a fixed asset can include tangible items like laptops and intangible items, such as a copyright, trademark, patent or goodwill.
Examples of Fixed Assets
Fixed assets can include buildings, computer equipment, software, furniture, land, machinery and vehicles. For example, if a company sells produce, its delivery trucks are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.
Importance of Fixed Assets
Information about a corporation’s assets helps create accurate financial reporting, business valuation and thorough financial analysis. Investors use these reports to determine a company’s financial health and decide whether to buy shares in or lend money to the business. Because a company may use a range of accepted methods for recording, depreciating and disposing of its assets, analysts need to study the notes on the corporation’s financial statements to find out how the numbers were determined.
Depreciation of Fixed Assets
Fixed assets lose value as they age. Because they provide long-term income, these assets are expensed differently than other items. Tangible assets are subject to periodic depreciation as intangible assets are to amortization. A certain amount of the asset’s costs is expensed annually. The asset’s value decreases along with its depreciation amount on the company’s balance sheet. The corporation can then match the asset’s cost with its long-term value.
How a business depreciates an asset can cause a book value, or amount paid for the asset, to differ from the current market value, or current price at which the asset could sell. Unless it contains natural resources, land may not be depreciated, because it cannot be depleted.