Accounting for Fixed Assets

Elaine Chan
March 14, 2022

What Are Fixed Assets?

Fixed assets are tangible assets that a company owns, such as Property, Plant, and Equipment, commonly known to be reported as PP&E on the Balance Sheet. Compare to other assets, fixed assets are expected to be used to generate income in long run (Investopia).  All fixed assets, except land, are subjected to depreciation costs over its useful years. Therefore, companies have to record the depreciation expense of the fixed asset at the end of a financial period.

What are the types of fixed assets?

There are two types of fixed assets:

1. Tangible Assets:

Tangible assets are assets that have a physical existence. These incorporate buildings, land, hardware, equipment, vehicle, furniture, etc.

2. Intangible Assets:

Intangible assets are those assets which don’t count any physical existence. This incorporates goodwill, licenses, registered or trademarks, intellectual property, etc.

Understanding Terms Associated to Fixed Assets

  • Book value: the purchase cost of the fixed asset paid by the company
  • Depreciation: the devaluation of the asset in forms of typical wear and tear, expressed as depreciation expenses over its useful life  
  • Impairment: write offs to the value of the fixed asset when the book value drops below the market value
  • Salvage value: the estimate net worth of the fixed asset less depreciation over its useful life

Benefits of Fixed Assets

Fixed assets generate revenues mainly through operations and rentals. For manufacturers, factories, plants, equipment and machines are important assets. These PP&Es account for a large portion of a manufacturer’s capital. As a result, many creditors and investors look at the amount of fixed assets that a company owns to determine its financial standing.  

How does Fixed Assets help us evaluate a company’s financial performance?

The acquisition of fixed assets is reported in the investment section of the Statement of Cash Flows (selling as cash inflows and acquiring as cash outflows). Therefore, the numbers reflect the

The More Fixed Assets a Company Owns, The Better?

Usually, the more fixed assets a company holds, the better. However, the utilization of fixed assets to the company’s operations, and the ability to receive rents are other indicators to determine whether a company has enough cash flows. Return on Investment (ROI) is another indicator to show the extent of use of fixed assets in a company’s operations. The higher the return on investment, the more the company is using its fixed assets to generate revenues. Favorable numbers in Return on Investment are the basis of a healthy and solid business.  

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On behalf of the Accounting Department,

Elaine Chan

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