Fixed asset

What is a fixed asset?

Fixed assets are long-term tangible assets that businesses employ to generate revenue.

Fixed assets have more than one year of useful life and offer substantial long-term financial gain. They are often known as capital assets and are represented on the balance sheet by the terms like Fixed assets, property, plant, and equipment, etc. Fixed assets are usually not readily convertable into cash or cash equivalent.

Fixed assets’ importance

Any company’s fixed assets are essential. Apart from generating revenue, fixed assets are closely examined by investors. For instance, the fixed asset turnover ratio is used to measure the efficiency of fixed assets in generating sales.

Companies that utilise fixed assets more efficiently have a competitive advantage. Understanding what is and isn’t a fixed asset is critical for business owners and investors as it affects a company’s worth.

Types of fixed assets

Tangible assets

A tangible asset exists in the physical form. Land, buildings, and machinery are examples of tangible assets.

Intangible assets

An intangible asset does not have a physical form. Intangible assets include intellectual property, goodwill, trademarks, copyrights, and patents.

What is a fixed asset register?

It is a detailed list of all a company’s fixed assets. Its primary purpose is to let an organisation collect and retain both financial and non-financial information about each asset and quickly identify and verify an asset when required.

Accounting for fixed asset

Accounting for fixed assets requires recording a variety of transactions, including the following:

Recording of asset

It is the first type of accounting entry for purchasing an asset. If the asset is purchased on credit, the entry will be a credit to the account payable account and a debit to the respective fixed asset account.

Depreciation

Accounting measures the depreciation of fixed assets over an assets useful economic life. Depreciation is calculated using a variety of techniques. The most widely used method is the straight-line method.

Revaluation

An examination to record its current fair market value(FMV).

Impairment

Also known as writing down, this acts as the recorded reduction in value due to circumstances or events.

Disposal

An asset will function in the organisation based on its useful life. It must be scrapped or sold after that period.