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 .
Fixed Assets
Definition
Fixed assets refer to long-term tangible property or equipment owned by a business and used in its operations to generate income. These assets are expected to be used for more than one year before they are worn out, consumed, or converted into cash. Companies can depreciate the value of these assets to account for their natural wear and tear. Common fixed assets listed on the balance sheet include real estate, buildings, and equipment.
Origin
The concept of fixed assets originated in accounting, dating back to the Industrial Revolution. During this period, businesses began investing heavily in machinery and buildings, and the long-term value of these assets needed to be accurately reflected in financial statements. As accounting standards evolved, the definition and treatment of fixed assets became more standardized.
Categories and Characteristics
Fixed assets can be categorized as follows:
- Land and Buildings: Includes land, office buildings, and factories owned by the company. These assets typically have a long useful life and are not depreciated.
- Machinery and Equipment: Includes various machines and equipment used for production or services. These assets wear out over time and require depreciation.
- Vehicles: Includes various transportation vehicles used by the company, such as cars and trucks. These assets also require depreciation.
- Furniture and Office Equipment: Includes office desks, chairs, computers, etc. These assets have a relatively shorter useful life but still require depreciation.
Specific Cases
Case 1: A manufacturing company purchases a machine worth 1 million yuan, with an expected useful life of 10 years. The company depreciates the machine annually, with a depreciation expense of 100,000 yuan. This means that each year, the company reduces the machine's value by 100,000 yuan on the balance sheet and increases the depreciation expense by 100,000 yuan on the income statement.
Case 2: A retail company purchases an office building worth 5 million yuan. Since land and buildings have a long useful life, the company decides not to depreciate the land but to depreciate the building. Assuming the building's useful life is 50 years, the annual depreciation expense is 100,000 yuan.
Common Questions
1. What is the difference between fixed assets and current assets?
Fixed assets are long-term tangible assets, while current assets are assets that can be converted into cash or consumed within one year, such as inventory and accounts receivable.
2. Why is depreciation necessary for fixed assets?
Depreciation reflects the natural wear and tear and the reduction in the asset's value over time, helping to allocate the asset's cost reasonably in financial statements.
