What are fixed assets?
Fixed assets are owned by an entity with a useful life of more than one year and cannot be converted into cash or cash equivalent within one year.
This group of assets is not reported as expenses when the entity purchases them. Yet, they report purchasing and other related costs on the balance sheet.
The entity charges the assets expenses based on the entity and their useful life using the applicable depreciation methods.
Depreciation expenses are recorded in the period that the entity charges assets in the income statement. Fixed assets are also called property, plant, and equipment.
Reporting in financial statements:
Fixed assets are the balance sheet items. They are reported at their book value at the end of the accounting period in different categories based on nature, their use, and the depreciation rate.
Their value decrease based on the depreciation that the entity change. In the balance sheet, fixed assets are normally reported at net book value or costs net of accumulated depreciation.
Accumulated depreciation is the credit account in the balance sheet under the fixed assets section. It is used to record all depreciation expenses up to the reporting date. Fixed assets affect the income statement through depreciation expenses that the entity charges during the period.
General Categories of Fixed Assets:
Entity reports fixed assets in the balance sheet; normally, assets are categorized into different categories based on types of assets and their usage.
The following are the general list categories of fixed assets:
- Buildings include an office building, warehouse, and other similar kinds. Their useful life is normally longer compared to other fixed assets.
- Computer equipment: Laptops, desktops, servers, printers, and other similar equipment. Useful life is around three to five years depending on the type of equipment.
- Computer Software: These are the software that the entity purchases or business processing or could be the software that the entity builds by their team.
- Furniture and fixtures: Tables, chairs, closets, cabinets, and others.
- Intangible assets: These are a franchise, copyright, trademark, and sometimes software also included here.
- Land: Land is classed separately from building and land improvement. Land could not be depreciated.
- Leasehold improvements are mainly related to the decoration or interior expenses incurred by the entity on the leased office or building.
- Machinery: This is the list of machines example cutting machines
- Vehicles: These are cars, trucks, and other related vehicles.
Here is the example of how fixed assets are classify in the balance sheet of the company.
| December 31, 2022 | December 31, 2021 | |
| Assets | ||
| Current Assets: | ||
| Cash and cash equivalents | $100,000 | $80,000 |
| Accounts receivable | 50,000 | 40,000 |
| Inventory | – | 5,000 |
| Total Current Assets | $150,000 | $125,000 |
| Fixed Assets: | ||
| Property, plant, and equipment | $300,000 | $250,000 |
| Less: Accumulated depreciation | ($50,000) | ($40,000) |
| Net property, plant, and equipment | $250,000 | $210,000 |
| Intangible assets | 75,000 | 70,000 |
| Total Fixed Assets | $325,000 | $280,000 |
| Total Assets | $475,000 | $405,000 |
| Liabilities and Equity | ||
| Current Liabilities: | ||
| Accounts payable | 20,000 | 15,000 |
| Accrued expenses | 10,000 | 12,000 |
| Total Current Liabilities | 30,000 | 27,000 |
| Long-term debt | 50,000 | 75,000 |
| Total Liabilities | 80,000 | 102,000 |
| Equity: | ||
| Common stock | 100,000 | 75,000 |
| Retained earnings | 295,000 | 228,000 |
| Total Equity | $395,000 | $303,000 |
| Total Liabilities and Equity | $475,000 | $405,000 |
What is the difference between current and non-current assets (fixed assets)?
The main difference between current and non-current assets (fixed assets) is their expected useful life.
Current assets are those expected to be converted into cash or used up within one year or one operating cycle of the business, whichever is longer.
These assets are typically used in the business’s daily operations and are expected to be sold or consumed soon.
Examples of current assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
On the other hand, non-current assets (or fixed assets) are those that are expected to be used in producing goods or services for a period longer than one year.
These assets are not intended for resale and are expected to benefit the business over one accounting period.
Examples of non-current assets include property, plant, and equipment (PP&E), intangible assets such as patents, trademarks, copyrights, and long-term investments.
Another difference between current and non-current assets is how they are reported on the balance sheet. Current assets are reported separately from non-current assets under the “Current Assets” section.
Non-current assets are reported separately under the “Fixed Assets” or “Property, Plant, and Equipment” section.
Are fixed assets classified differently from current assets?
Fixed assets are classified differently than current assets on a balance sheet.
Current assets refer to assets that are either expected to be converted into cash or consumed within one year or the operating cycle of the business, whichever is longer.
These assets are typically used in the business’s daily operations and are expected to be sold or consumed soon.
For examples, current assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
Fixed assets, on the other hand, are long-term assets that are not intended for sale and are expected to benefit the business for more than one year.
These assets are used to produce goods or services, including property, plant, and equipment, intangible assets such as patents and trademarks, and long-term investments. Fixed assets are also sometimes referred to as non-current assets.
On a balance sheet, current assets are reported separately from non-current assets (fixed assets). Current assets are listed first, followed by non-current assets.
This separation of assets helps to provide a clear picture of the company’s liquidity (ability to meet short-term obligations) and long-term investments.
Categorization Factors:
There are several factors that we use to categorize fixed assets. Those include the type or nature of assets and how those assets are used by the entity and sometimes based on the rate we charge fixed assets.
For example, machinery and vehicles are categorized into two different categories. These two types of fixed assets we use these assets are completely different even though their useful life might be the same.
Machinery is for production purposes in general, while vehicles are used for transportation or delivery.
Buildings and leasehold improvements are also categorized differently. Buildings are the property owned by the entity. For example, office buildings and warehouses owned by the entity.
However, some entities might rent offices, buildings, and warehouses to run their business. And the original decorations or interiors might not need entity expectations.
In this case, the entity might improve the leased building or warehouse at its cost. This is how leasehold improvement occurs and why they are differently categorized from the building.
The benefit of fixed assets categorization:
There are many benefits that an entity can obtain from the proper categorization of fixed assets. For example, fixed assets accountants might perform reconciliation between accounting records to the listing they use to help control the assets.
Proper categorization could help them to do the reconciliation effectively and correctly. Proper categorization of assets could also assist the accountant in doing fixed assets depreciation calculations correctly and effectively.
