The physical assets that are held for an extended period of time and employed by a company to generate revenue are known as fixed assets. Because they have a useful life of more than one year, fixed assets bring in revenue for the company for the company’s entire existence. In the balance sheet, the phrase “Property, Plant, and Equipment” refers to fixed assets, which are also known as capital assets. Other names for fixed assets include capital assets. Cash is often not an easy asset to transform into fixed assets.
Importance of Investing in Fixed Assets
The acquisition of fixed assets is often quite profitable for corporations. A firm that specializes in artisan jewelry, for instance, cannot make items if they do not have access to a soldering gun. The following are important benefits that come with owning fixed assets:
They are a Source of Revenue in the Long Run.
It doesn’t matter whether they’re computers, buildings, cars, or equipment: in order for a firm to be successful over the long run, it has to have fixed assets that can give revenue over a prolonged period of time.
They Make it Easier for you to Execute Operations.
These days, computers are what make the world go round. The majority of companies recognize that fixed assets such as computers and other forms of technology are critical to running their operations effectively and smoothly.
It is not always the case that they lose Value.
The value of most fixed assets decreases with the passage of time, however, this is not always the case. For example, the value of land and real estate has a history of either being stable or even increasing through time (barring any disasters, of course.)
Various Categories of Fixed Assets
The term “tangible asset” refers to an asset with a physical presence in the world. Real estate, buildings, and equipment are all examples of tangible assets.
An intangible asset is an asset that does not have a physical existence. Intangible assets include things like brand awareness, intellectual property, and goodwill. Some examples of intangible assets include patents, trademarks, and copyrights.
The formula for calculating net fixed assets is as follows: total fixed assets minus accumulated depreciation net fixed assets
Keeping Track of fixed Assets in Accounting
Recording a number of transactions pertaining to fixed assets is required while doing accounting for fixed assets. Some examples of these transactions are as follows:
The recording of the asset is the first form of accounting entry that has to be made once the item has been purchased. If the asset is acquired via credit, the entry will consist of a credit to the account payable and a debit to the appropriate account for the fixed asset.
In accounting, the value of fixed assets decreases over time, a process known as depreciation. Depreciation may be calculated using a variety of different approaches. The approach known as the straight-line method is the one that has the greatest amount of use.
The organization will make use of an asset for as long as it is still helpful to the business. After that time, it is either going to be sold or scrapped. To carry it out, one must first credit the corresponding fixed asset account with the appropriate amount of money, then debit the cumulative depreciation account of any and all charges for depreciation.
Fixed Assets’ Annual Depreciation Costs
The portion of the cost of a fixed asset that is recorded as an investment during the current accounting years is referred to as depreciation. Depreciation is the term used to describe the portion of an asset’s value that is consumed during the current accounting period. This is because a fixed asset often has a useful lifespan that spans more than one accounting period.
There are several different methods through which depreciation may be measured. The straight-line method of depreciation is the most straightforward, and it involves dividing the cost of the fixed asset by the number of accounting years that it is anticipated to be in use.
How can Businesses Put their Fixed Assets to Use?
There are a wide variety of commercial applications for fixed assets to fulfill. In general, use cases may be categorized into one of the following three groups:
#1. The manufacture of goods
If a corporation manufactures and sells a product, then it will have some fixed assets that they employ to manufacture the product. For instance, the roaster that a coffee roasting firm utilizes on a daily basis to roast the coffee beans that they have painstakingly procured is a significant fixed asset for the company. The following are some further examples of fixed assets that are used in the manufacturing of supplies or goods:
Sewing machines belonging to a modestly sized fashion business
A table saw used in the furniture-making industry
A tattoo artist’s tattoo gun
A pickup vehicle that belongs to someone in maintenance
The computers used by a content marketing agency
The many workshops or manufacturing facilities of a food manufacturer
#2. Rentals managed by a third party
While some firms make use of their fixed assets, the cash flow of other businesses may be dependent on renting out their fixed assets to other parties in order to generate income. Take, for instance:
A real estate corporation owns many buildings and rents out space in those buildings to individuals and businesses.
An automobile firm not only sells vehicles to clients but also rents them out to those buyers.
A farmer will rent out their barn on their property for events such as weddings.
In conclusion, almost all businesses own certain fixed assets that they put to use in the organization of their day-to-day operations, whether it be to simplify financial transactions, quicken the pace of labor, or safeguard other assets. For instance, the operational fixed assets of a small home goods business are most likely to comprise a point-of-sale system, computers for both the owners and the customers, and a security system for the storefront.