Accounting of Fixed Assets

Fixed Asset in Accounting? With

Examples
By
WILL KENTON

Updated February 16, 2024

Reviewed by JeFreda R. Brown

Full Bio

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Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and
researcher who has assisted thousands of clients over a more than two-decade career. She is
the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.
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What Is a Fixed Asset?

The term fixed asset refers to a long-term tangible piece of property or equipment that a firm
owns and uses in its operations to generate income. The general assumption about fixed
assets is that they are expected to last, be consumed, or be converted into cash after at least
one year.

As such, companies are able to depreciate the value of these assets to account for natural
wear and tear. Fixed assets most commonly appear on the balance sheet as property, plant,
and equipment (PP&E).

KEY TAKEAWAYS:

 Fixed assets are items that a company plans to use over the long term to help generate
income.
 Fixed assets are most commonly referred to as property, plant, and equipment.
 Current assets are any assets that are expected to be converted to cash or used within a
year.
 Noncurrent assets, in addition to fixed assets, include intangibles and long-term
investments.
 Fixed assets are subject to depreciation to account for the loss in value as the assets
are used, whereas intangibles are amortized.
Accounting of Fixed Assets
 Accounting of Fixed Assets
Investopedia / Laura Porter

Understanding Fixed Assets in Corporate

Accounting
A company's balance sheet statement includes its assets, liabilities, and shareholder equity.
Assets are divided into current assets and noncurrent assets, the difference of which lies in
their useful lives. Current assets are typically liquid, which means they can be converted into
cash in less than a year. Noncurrent assets refer to assets and property owned by a business
that are not easily converted to cash and include long-term investments, deferred charges,
intangible assets, and fixed assets.

The term alludes to the fact that these assets won't be used up or sold within the accounting
period. A fixed asset typically has a physical form and is reported on the balance sheet as
PP&E. Companies purchase fixed assets for any number of reasons including:

 The production or supply of goods or services

 Rental to third parties
 Use in an organization

Fixed Assets and Depreciation

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 while intangible assets are subject to amortization.1 A certain amount
of an asset's cost 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 its book value (the asset value that appears on
the balance sheet) to differ from the current market value (CMV) at which the asset could
sell. Land is one fixed asset that cannot be depreciated.1

A fixed asset does not necessarily have to be fixed (i.e., stationary or immobile) in all senses
of the word.

Fixed Assets on Financial Statements

The acquisition or disposal of a fixed asset is recorded on a company's cash flow statement
under the cash flow from investing activities. The purchase of fixed assets represents a cash
outflow (negative) to the company while a sale is a cash inflow (positive). If the asset's value
falls below its net book value, the asset is subject to an impairment write-down. This means
that its recorded value on the balance sheet is adjusted downward to reflect that it is
overvalued compared to the market value.2

When a fixed asset reaches the end of its useful life, it is usually disposed of by selling it for
a salvage value. This is the asset's estimated value if it was broken down and sold in parts. In
some cases, the asset may become obsolete and will, therefore, be disposed of without
 Accounting of Fixed Assets
receiving any payment in return. Either way, the fixed asset is written off the balance sheet as
it is no longer in use by the company.

Some companies refer to their fixed assets as capital assets.

Fixed Assets vs. Current Assets and Noncurrent

Assets
Both current assets and fixed assets appear on the balance sheet, with current assets meant to
be used or converted to cash in the short term (less than one year) and fixed assets meant to
be used over the longer term (more than one year).3 Current assets include cash and cash
equivalents, accounts receivable (AR), inventory, and prepaid expenses. Fixed assets are
depreciated, while current assets are not.

Fixed assets are a form of noncurrent assets. Other noncurrent assets include long-term
investments and intangibles. Intangible assets are fixed assets to be used over the long term,
but they lack physical existence. Examples of intangible assets include goodwill, copyrights,
trademarks, and intellectual property. Meanwhile, long-term investments can
include bond investments that will not be sold or mature within a year.1

Benefits of Fixed Assets

Information about a corporation's assets helps create accurate financial reporting, business
valuations, and thorough financial analysis. Investors and creditors 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 are determined.

Fixed assets are particularly important to capital-intensive industries, such as manufacturing,

which require large investments in PP&E. When a business is reporting persistently negative
net cash flows for the purchase of fixed assets, this could be a strong indicator that the firm is
in growth or investment mode.2

Examples of Fixed Assets

Fixed assets can include buildings, computer equipment, software, furniture, land, machinery,
and vehicles.

For example, if a company sells produce, the delivery trucks it owns and uses are fixed
assets. If a business creates a company parking lot, the parking lot is a fixed asset. However,
personal vehicles used to get to work are not considered fixed assets. Additionally, buying
rock salt to melt ice in the parking lot would be considered an expense and not an asset at all.
 Accounting of Fixed Assets
What Is the Difference Between Fixed Assets and
Current Assets?
The major difference between the two is that fixed assets are depreciated, while current assets
are not.1 Both current and fixed assets do, however, appear on the balance sheet.

Fixed assets are company-owned, long-term tangible assets, such as forms of property or
equipment. These assets make up its day-to-day operations to generate income. Being fixed
means they can't be consumed or converted into cash within a year. As such, they are subject
to depreciation and are considered illiquid.

Current assets, on the other hand, are used or converted to cash in less than one year (the
short term) and are not depreciated. Current assets include cash and cash equivalents,
accounts receivable, inventory, and prepaid expenses.3

What Are Examples of Fixed Assets?

Fixed assets can include buildings, computer equipment, software, furniture, land, machinery,
and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses
are fixed assets.

What Are Other Types of Noncurrent Assets?

Other noncurrent assets include long-term investments and intangibles. Intangible assets are
those that can lack physical existence but can still be used over the long term. These types of
assets include goodwill, copyrights, trademarks, and intellectual property. Long-term
investments can include bonds that won't be sold or mature within a year.1

Is a Car a Fixed Asset?

It depends on how the car is being used. If the car is being used in a company's operations to
generate income, such as a delivery vehicle, it may be considered a fixed asset. However, if
the car is being used for personal use, it would not be considered a fixed asset and would not
be recorded on the company's balance sheet.

Is a Laptop a Fixed Asset?

If the laptop is being used in a company's operations to generate income, such as by an
employee who uses it to perform their job, it may be considered a fixed asset. In this case, the
laptop would be recorded on the company's balance sheet as property, plant, and equipment
(PP&E). However, if the laptop is being used for personal use, it would not be considered a
fixed asset and would not be recorded on the company's balance sheet.

The Bottom Line

 Accounting of Fixed Assets
A fixed asset is a long-term tangible property or piece of equipment that a company owns and
uses in its operations to generate income. These assets are not expected to be sold or used
within a year and are sometimes recorded on the balance sheet as property, plant, and
equipment (PP&E). Fixed assets are subject to depreciation, which accounts for their loss in
value over time, whereas intangible assets are amortized. Fixed assets are often contrasted
with current assets, which are expected to be converted to cash or used within a year.

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ARTICLE SOURCES
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