Fixed assets: definitions, comparisons & examples

Fixed assets stand as a foundation in accounting and finance, the term 'fixed assets' is pivotal for businesses and individuals. Fixed assets are long-term resources with physical substance, acquired for use in the operations of a business, not intended for sale in the regular course of the business's operation. This article will explain fixed assets definition, distinguish between fixed assets, current assets, and non-current assets, provide examples, and answer frequently asked questions.

Asset class breakdown: fixed, current, and non-current

Understanding the difference between fixed, current, and non-current assets is important to understanding how a business operates and manages its resources. Current assets are assets that a company expects to convert to cash or use up within one year.

The classification of assets on a company's balance sheet is more than an exercise in labeling. it's a reflection of the company's liquidity and operational strategy. Here's a comparative look at fixed, current, and non-current assets:

Fixed assets vs. current assets v non-current assets

To provide a clearer understanding, below are some specific examples within each asset category:

Fixed assets:

These are long-term tangible assets used in the operations of a business. They are not intended for sale within the business's regular course of operations and are subject to depreciation over time, except for land.

• Buildings: A manufacturing plant owned by a company to produce goods.
• Machinery: A printing press used by a publishing company.
• Vehicles: Company-owned trucks used by a logistics firm for delivery services.
• Furniture: Office desks and chairs used by employees.
• Computer hardware: Servers and desktop computers are used to manage business operations.

Current assets:

Current assets are all the assets a company expects to convert into cash or use within one year. They are essential for the day-to-day funding of operations.

• Cash and cash equivalents: Petty cash and money in checking accounts.
• Short-term marketable securities: Stocks or bonds that can be quickly sold.
• Accounts receivable: Money owed by customers for goods or services delivered.
• Inventory: Raw materials and finished goods ready for sale.
• Prepaid expenses: Payments made in advance for services or goods, like insurance.

Non-current assets (excluding fixed):

These assets are not as liquid as current assets and are utilized over longer periods. They include both tangible and intangible assets.

• Long-term investments: Investments in other companies or long-term bonds that a company does not intend to liquidate within the next year.
• Intellectual property: Patents for inventions, copyrights for media and software, and trademarks for brand names.
• Long-term bonds: Bonds that mature in more than one year.
• Real estate investment: Property owned as an investment, not used in the daily operations of the business.
• Goodwill: An intangible asset that arises when a business is acquired for more than the fair value of its net identifiable assets.

FAQ’s

1. Why is the classification of an asset as fixed or current important?
   Classifying an asset as fixed or current has significant implications for financial reporting and analysis. Current assets are key indicators of a company's short-term financial health and liquidity, while fixed assets are critical for long-term operational capabilities.
2. Can fixed assets be revalued?
   Yes, under certain accounting frameworks like International Financial Reporting Standards (IFRS), fixed assets can be revalued. If the fair market value of a fixed asset increases significantly above its book value.
3. How do companies determine the useful life of a fixed asset?
   The useful life of a fixed asset is estimated based on the asset's expected longevity, usage patterns, and industry standards.
4. Are renovations to a fixed asset capitalized?
   Yes, substantial renovations that extend the life of a fixed asset or enhance its value are typically capitalized and depreciated over their useful life.
5. How do fixed assets impact financial ratios?
   Fixed assets influence several financial ratios, including the asset turnover ratio and return on assets, which measure the efficiency and profitability of a company's use of its assets.

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