What are fixed assets?

In bookkeeping and accounting, fixed assets, also known as property, plant, and equipment (PP&E), are tangible, long-term assets that a business uses in its operations to generate revenue. Fixed assets are not intended for resale, and they provide value to the company over multiple accounting periods. These assets are typically recorded on the balance sheet and are subject to depreciation, which allocates their cost over their estimated useful life.

Key characteristics of fixed assets in accounting include:

1. Tangibility: Fixed assets are physical assets with a tangible presence. They can be seen, touched, and are usually long-lasting.
2. Long-Term Use: Fixed assets are not intended for immediate sale or consumption. Instead, they are used in the business’s day-to-day operations to generate revenue over several years or accounting periods.
3. Capitalization: The cost of acquiring or constructing fixed assets is capitalized on the balance sheet, meaning it is recorded as an asset rather than an immediate expense. Capitalization allows for the allocation of the asset’s cost over its useful life.
4. Depreciation: Fixed assets are subject to depreciation, which is the systematic allocation of their cost over time. Depreciation reflects the gradual wear and tear, obsolescence, or loss of value of the asset. Depreciation expense is recorded on the income statement.

Common examples of fixed assets include:

1. Property: This category includes land, buildings, and any improvements to land or buildings. Land is typically not depreciated, but buildings and improvements are.
2. Machinery and Equipment: This includes manufacturing machinery, vehicles, office equipment, and any other equipment used in the production process or daily operations.
3. Furniture and Fixtures: Items such as office furniture, shelving, cabinets, and fixtures like lighting and plumbing.
4. Computer Hardware: Desktop computers, laptops, servers, and other computer hardware used for business operations.
5. Vehicles: Company-owned vehicles used for transportation or delivery purposes.
6. Leasehold Improvements: Improvements made to leased premises, which can include interior renovations, fixtures, and signage.
7. Intangible Assets: In some cases, intangible assets, such as patents, copyrights, and trademarks, may be considered fixed assets and subject to amortization rather than depreciation.

Fixed assets are important for several reasons:

• They contribute to a company’s ability to generate revenue and achieve its business objectives.
• They are a significant portion of a company’s capital investment and are reflected on the balance sheet.
• Depreciation of fixed assets impacts the company’s income statement, affecting profitability and taxes.
• Fixed assets are considered when assessing a company’s financial health and valuation.

Proper management of fixed assets involves regular maintenance, monitoring of depreciation, and periodic revaluation to ensure their carrying values are accurate. Additionally, businesses must comply with accounting standards and tax regulations related to fixed assets, as these can impact financial reporting and tax liability.

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