What are fixed assets?
Fixed assets are the assets that own by entity that have useful life for more than one year and could not be convert into cash or cash equivalent within one year. These group of assets are not report as expenses at the time entity purchase them. Yet, they are reporting in the balance sheet at the purchasing and others related costs.
Entity charges the assets expenses based on the way how entity as well as their useful life by using the applicable depreciation methods. Depreciation expenses are recorded in the period that entity charge assets in the income statement. Fixed assets also called as property, plant and equipment.
Reporting in financial statements:
Fixed assets are the balance sheet items and they are report at their book value at the end of accounting period by present in different categories based on nature, the ways how they are used as well as the depreciation rate. Their value decrease based on the depreciation that 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 fixed assets section. It is used to record all depreciation expenses up to the reporting date. Fixed assets affect income statement through depreciation expenses that entity charge during the period.
General Categories of Fixed Assets:
Entity reports fixed assets in balance sheet and normally assets are categories into different categories based on types of assets and their usages.
The following are the list general categories of fixed assets:
- Buildings: These include office building, warehouse and others similar kind of. Their useful life normally longer compared to others fixed assets.
- Computer equipments: These include laptops, desktops, servers, printers and others similar kind of equipments. Useful life is around three to five years depending on type of equipments.
- Computer softwares: These are the software that entity purchases or business processing or it could be the software that entity build by their own team.
- Furniture and fixtures: These are tables, chairs, closets, cabinets and others similar.
- Intangible assets: These are franchise, copyright, trademark and sometime software also including here.
- Land: Land is classed separately from building and land improvement. Land could not be depreciated.
- Leasehold improvements: They are mainly related to the decoration or interior expenses incur by entity on the leased office or building.
- Machinery: These are the list of machines example cutting machines
- Vehicles: These are the cars, trucks, and others related vehicles.
There are numbers of factors that we use to categorize fixed assets. Those including type or nature of assets and the way how those assets are used by entity and sometime based on the rate that we charge fixed assets.
For example, machineries and vehicles are categories into two different categories these two types of fixed assets since the way we use these assets are completely different even though their useful life might be the same. Machineries are for production purpose in general while vehicles are used for transportation or delivery.
Buildings and leasehold improvements are also categorizing differently. Buildings are the property that own by entity. For example, office building and warehouses that own by entity.
However, some entity might rent offices building and warehouse for running their business. And the original decorations or interiors might not need entity expectation. In this case, entity might do some improvement to the lease building or warehouse at its own costs. This is how leasehold improvement occur and why they are differently categorizing from building.
Benefit of fixed assets categorization:
There are many benefit that entity can obtain from proper categorization of fixed assets. For example, fixed assets accountants might perform fixed assets reconciliation between accounting records to the listing that 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 accountant to do fixed assets depreciation calculation correctly and effectively.