Fixed Assets: Concept, Formula, Characteristics, Types and Calculation

What are Fixed Assets?

Fixed assets, also known as tangible assets, are long-term resources that a business owns and utilizes to generate revenue. These assets are not meant for sale but rather for continuous use in operations. Fixed assets can include property, plant, equipment, vehicles, machinery, buildings, land, and other physical assets that have a useful life of more than one accounting period.

 

According to generally accepted accounting principles (GAAP), fixed assets are defined as assets with a useful life extending beyond one year that are not acquired for resale. These assets are expected to provide economic benefits to the business over a prolonged period. Fixed assets are recorded on the balance sheet and represent a significant portion of a company’s total assets. They are expected to be consumed or converted into cash within one year.

Fixed assets are crucial for the operational efficiency and long-term success of a business. They enable companies to carry out their core activities, produce goods, and provide services. Fixed assets can appreciate or depreciate over time due to various factors, such as wear and tear, technological advancements, or changes in market conditions. Depreciation is a method used to allocate the cost of fixed assets over their estimated useful life to reflect their eventual replacement or upgrade.

Proper management of fixed assets is essential to optimize their utilization, minimize maintenance costs, and ensure compliance with accounting standards. Accurate recording, periodic evaluation, and appropriate depreciation calculations are necessary to reflect the true value of fixed assets in the company’s financial statements. By monitoring fixed assets and making informed decisions regarding their acquisition, maintenance, and disposal, businesses can effectively manage their resources and enhance their financial performance.

Formula to Calculate Fixed Assets

The formula to calculate fixed assets is:

Fixed Assets = Total Assets – Current Assets – Intangible Assets

Here,

Total Assets refers to the sum of all assets owned by a business. It includes both current assets (assets expected to be converted into cash within one year) and non-current assets (assets expected to provide economic benefits beyond one year).

Current Assets are assets that can be easily converted into cash or used up within a year. They typically include cash and cash equivalents, accounts receivable, inventory, and short-term investments.

Intangible Assets are non-physical assets that hold some monetary value. Examples of intangible assets include patents, trademarks, copyrights, brand value, goodwill, and intellectual property.

Characteristics of Fixed Assets

Fixed assets possess several characteristics that distinguish them from other types of assets. Understanding these characteristics is important for effective management and accounting of fixed assets. Here are some key characteristics of fixed assets:

1. Tangibility: Fixed assets are physical in nature and have a tangible form. They can be seen, touched, and have a physical presence within the business. Examples of tangible fixed assets include buildings, machinery, vehicles, and land.

2. Longevity: Fixed assets are intended for long-term use in the business. They have a useful life that extends beyond a single accounting period. Unlike current assets, which are expected to be converted into cash within one year, fixed assets are held for ongoing operations and provide economic benefits over an extended period.

3. Substantial Value: Fixed assets typically represent a significant portion of a company’s total assets. They often involve substantial investment by the business due to their value and importance in generating revenue and supporting operations. Fixed assets contribute to the net worth and overall financial position of a company.

4. Income Generation: Fixed assets are utilized in business operations to generate revenue. For example, machinery is used in the manufacturing process, while buildings are rented out to tenants. Fixed assets directly contribute to the production of goods or the provision of services, thereby enhancing profitability.

5. Depreciation: Fixed assets are subjected to depreciation, which reflects their gradual wear and tear, obsolescence, or loss of value over time. Depreciation is recorded as an expense in the financial statements to allocate the cost of the asset over its useful life. This recognition of depreciation is important for accurate financial reporting and reflects the true value of fixed assets.

6. Maintenance and Upkeep: Fixed assets require regular maintenance and upkeep to ensure their proper functioning and longevity. This includes routine inspections, repairs, and upgrades to preserve the asset’s value and extend its useful life. Proper maintenance helps optimize asset performance and avoid costly breakdowns or disruptions in operations.

7. Capital Expenditure: Acquiring or upgrading fixed assets often involves significant capital expenditure for a business. These investments are typically planned and budgeted in advance, as they have long-term implications for the company’s financial resources. Capital budgeting and investment analysis are important considerations when acquiring or replacing fixed assets.

Types of Fixed Assets

Fixed assets can be categorized into several types based on their nature and purpose within a business. The common types of fixed assets include:

1. Property: This category includes land, buildings, offices, warehouses, and any other structures owned by the business. Property assets provide a physical location for business operations and often appreciate value over time.

2. Plant and Equipment: This category encompasses machinery, tools, vehicles, furniture, and other equipment used in the production or service delivery process. Plant and equipment assets are essential for manufacturing, construction, transportation, and other industries.

3. Infrastructure: Infrastructure assets refer to long-term assets that support the functioning of a business or society as a whole. Examples include roads, bridges, communication networks, power supply systems, water and sewage systems, and other essential infrastructure components.

4. Natural Resources: Fixed assets can also include natural resources that are acquired for future use or extraction. These resources can include mineral deposits, oil reserves, timberlands, and other resources with long-term value.

5. Construction in Progress: Construction in progress refers to assets that are under construction or development but are not yet ready for use. These assets can include buildings, infrastructure projects, or any other long-term projects that are in progress.

How to Calculate Fixed Assets?

Illustration:

ABC Corporation has total assets of ₹10,00,000, Current assets of ₹3,00,000, and intangible assets of ₹2,00,000. Calculate fixed assets.

Solution:

Fixed Assets = Total Assets – Current Assets – Intangible Assets

Fixed Assets = 10,00,000 – 3,00,000 – 2,00,000

Fixed Assets = ₹5,00,000

How Fixed Assets are shown in the Balance Sheet?

In the balance sheet, fixed assets are typically presented under a separate section known as “Property, Plant, and Equipment” or “Fixed Assets.”