Fixed Assets: Definition and Examples

By Anastasia Hinojosa

Updated September 30, 2021 | Published February 4, 2020

Updated September 30, 2021

Published February 4, 2020

Anastasia Hinojosa is an experienced financial accountant with degrees from Texas A&M-Corpus Christi and Columbia University. She has worked in the healthcare field for over ten years.

Assets can be categorized as current or noncurrent depending on how quickly they can be converted into cash. A fixed asset, a subcategory of a noncurrent asset, is valuable for an organization to hold to help it generate income, in addition to expanding staff and department processes. In this article, we will discuss what a fixed asset is, the differences between fixed assets in comparison to others and how to record fixed assets on financial statements.

Key takeaways

  • Fixed assets are generally physical property that a company will own for longer than a year.

  • Common fixed assets are land, buildings, equipment, vehicles and computer software.

  • Companies have some room to name their fixed asset accounts in a way that suits their business. “Furniture, fixtures and equipment” is a common name that combines office furniture, electronic equipment and computer software.

  • Most fixed assets are depreciated over time to account for “usage” of the item. It spreads the expense of the item over its useful life. Depreciation does not reflect fair market value of the item.

  • The IRS has guides regarding useful life and calculating depreciation. You can also purchase handbooks that list the useful life for common items in your industry.

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What is a fixed asset?

A fixed asset is a long-term asset that is generally tangible. Non-physical items such as trademarks are also long-term but categorized differently on the balance sheet. A long-term asset lasts longer than a financial reporting period. Usually, when companies possess a fixed asset, the intent is to hold it for longer than a year and utilize it according to a strategic plan. The cost of a fixed asset is capitalized and not expensed. This means that the cost is recorded as an asset on the balance sheet account and not in an expense account.

Some fixed assets will have capitalization thresholds, which are set by internal company policy. For instance, a company may set their fixed asset limit for computers at $5,000. A $2,500 computer will not become a fixed asset. The cost will be expensed on the income statement. A $5,000 computer will become a fixed asset. The cost will become an asset on the balance sheet.The IRS does make recommendations for these thresholds; however, companies have some leeway in setting reasonable thresholds.

Reporting a fixed asset annually is standard procedure to keep stakeholders up to date on the company's financial state. On a balance sheet, a fixed asset appears as property, plant and equipment. Most fixed assets depreciate over time.

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Examples of fixed assets

A company can buy or sell fixed assets at any time. As a result, fixed assets can position a company for continuous growth depending on the investment it makes. Some examples of fixed asset include:

Buildings

Organizations that operate in physical locations could purchase many types of buildings:

  • Office spaces

  • Manufacturing plants

  • Storage warehouses

  • Retail store

If a company owns a building, then it will be capitalized to the Buildings fixed asset account.The land that a building sits on is recorded in a separate Land fixed asset account. These must be recorded separately because buildings depreciate, but land does not.

Computer hardware and software

Most companies purchase computers and software to perform basic functions. Computer hardware could include PCs, laptops, servers and tablets. Whether computer hardware or software is capitalized will depend on the company’s capitalization threshold. It is important to remember that costs to acquire the asset and to set it up for use are included in the “asset cost”. If the capitalization threshold is $5,000, then a $4,500 computer with $500 additional freight, taxes and installation costs should be capitalized because the true cost of the asset is $5,000.

Furnishings

Furniture or large appliances over the capitalization threshold are fixed assets. Furniture could include desks, chairs, tables, cubicles, lighting fixtures and filing cabinets. For businesses that have a break room or kitchen, furnishings could also include a microwave, refrigerator and other large appliances. When a company sets the capitalization threshold, it must have a written policy, and it must be able to defend its reasoning in an audit.

Land

Land includes any land that a company owns with or without a building on location. It's the only fixed asset that doesn't depreciate over time. Improvements to land are capitalized separately and are depreciated. Land Improvements could include adding sidewalks, driveways, fences and outdoor lighting.

Machinery

Machinery includes equipment that an organization purchases to help employees do their jobs. Machinery could include factory or manufacturing equipment, commercial or 3D printers, transport machinery and construction tools.

Vehicles

Companies could list a variety of vehicles as fixed assets, such as semi-trucks, cars, airplanes, boats and trains. Businesses that commonly have multiple vehicles listed as fixed assets include:

  • Transport companies

  • Airlines

  • Rental car agencies

  • Shipping and receiving companies

  • Cruise lines

Organizations that purchase company cars for employees to use can also list the vehicles as fixed assets.

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How are fixed assets different from other assets?

Fixed assets are one category made up of assets reported on a balance sheet. Here is how a fixed asset is different from others:

Fixed assets vs. current assets

An asset is frequently defined in accounting as something with future economic benefit. A current asset is an asset that is reasonably assumed to be used within a year. A fixed asset is an asset that will not be reasonably used within a year. Current assets do not depreciate in comparison to most fixed assets. Some examples of current assets include prepaid expenses, accounts receivable and certain materials and supplies. Not all companies track office supplies as assets, but a company can track office supplies as a current asset and expense them as they are issued to employees for use. This would make more sense for bulk purchases for which the cost cannot be applied to a specific cost center as opposed to the purchase of specific supplies for a specific employee or department.

Fixed assets vs. intangible assets

Even though fixed assets are noncurrent assets, they differ from the intangible assets that fall under this category. Intangible assets consist of company property such as trademarks, intellectual property or public goodwill. Also, investments in the stock market can be viewed as intangible despite the value to a company or stockholder.

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How to record fixed assets

You can record fixed assets in a computer system, which will usually calculate depreciation and gains or losses from disposal, or you can track them manually in a spreadsheet. If you perform accounting duties for your company, here are a few steps you can try when recording fixed assets:

1. Review previous financial records and fixed assets from previous years

Gather the records from previous years to get a fuller idea of your current fixed assets. Since a company needs to hold a fixed asset for at least one year, you should have at least one record from the previous year for certain fixed assets. You'll also need to calculate the depreciation for each fixed asset your company recorded to ensure you have accurate numbers.

It is best to keep a running log of all fixed assets. Computer software makes tracking fixed assets much easier, although it will depend on the information about the asset being entered correctly. Tracking fixed assets in a spreadsheet is also workable for smaller companies. You will need to track the historical value of the item (asset cost before depreciation) as well as the book value (asset cost after depreciation).

2. List newly-acquired fixed assets

You'll also need to record any fixed assets your company acquired over the past year. Find payments or receipts for items purchased to determine the initial value of the item. You will need to note the useful life of the item as well as the salvage value. The salvage value can be $0 if you do not expect to get any money for the item when it is disposed of. A company can also set a standard salvage value (for instance, 10% of acquisition cost). Otherwise, it will be an estimate of what you expect to get for the item when you dispose of it (sell it).

You will use this information to calculate depreciation, which should be calculated at least quarterly for tax purposes. There are a few acceptable methods for calculating depreciation, so every company has to choose its depreciation method.

For example, your company purchases a bulldozer for $500,000. After performing research, you determine that the useful life of the bulldozer is 10 years and the salvage value is $100,000. You can expect the bulldozer to depreciate by $400,000 over 10 years of use. Your company’s depreciation method will determine how much of that $400,000 is depreciated each year.

3. List disposed assets

When you dispose of an item, you will credit the fixed asset account by the historical value and you will debit the accumulated depreciation account by how much the asset has depreciated. You must include depreciation to the sale or disposal date. If you sell the item, then you must calculate a gain or loss based on the book value of the item. Sale price minus book value equals the gain (positive number) or loss (negative number). In the case of a sale, the journal entry will debit cash (sales price), debit accumulated depreciation, credit the fixed asset account and then debit a loss or credit a gain.

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