Fixed assets are long term investments in the operation of the entity. Long term investments in terms of accounting conventions mean the asset whose useful life is more than 12 months.
These assets are illiquid in nature, unlike current assets which can be easily converted into cash. Fixed assets provide value over the number of years. Fixed assets are not bought for resale but rather it is bought to create value in the business. It is used in routine business activities.
Fixed Assets in the Balance Sheet:
Assets, liabilities, and capital by shareholders form the balance sheet in a broader way. Assets are classified into current and non-current assets.
Non-current assets include fixed assets and investments which cannot be easily converted into cash. In the balance sheet, Fixed assets are reported at their written down value after taking into considerations accumulated depreciation.
There are also cases where fixed assets can be tested for impairment. We will talk about various tidbits of fixed assets in the balance sheet later. Let us first delve into its types as:
Tangible Fixed assets
These assets have a physical existence and can be touched. This included building, plants, and machinery, equipment, computers, furniture, etc.
Intangible fixed assets
These assets do not have a physical existence and cannot be touched. This includes intangible assets such as patents, trademarks and other assets with artificial presence.
Let us talk about various items of fixed assets which impact its amount in the balance sheet:
This is the purchase/acquisition cost of the asset. The purchase cost including shipping costs, non-refundable taxes, installation costs, etc among others. It is this cost on which depreciation is charged on a yearly basis.
Depreciation or Amortization
Fixed assets are subject to depreciation each year based on various methods of depreciation such as a straight-line method or reducing balance method of depreciation among others.
These depreciations are accumulated each year and summation of depreciation is called accumulated depreciation is deducted from the historical cost to arrive at written down value. Amortization is a term used generally for intangible assets.
Written Down value
When accumulated depreciation is subtracted from the historical cost of the asset, we arrive at the written down value. Assets are always shown at written down value at year-end.
Interest to be capitalized
For instance, take the building. Till the building is constructed, the interest born on the loan taken to construct the building is to be added to the cost of the building.
After the building is constructed, the interest borne on the loan is debited to profit and loss account and not to the building account. This is the same as other classes of fixed assets.
When the fixed assets are subject to a permanent decline in their value, the impairment loss is to be recognized so as to arrive at justifiable cost as per the prevalent conditions of fixed assets.
Impairment loss has complicated rules which need to be applied to arrive at the value for fixed assets in the balance sheet.