What are fixed assets?
Fixed assets are the assets owned by an entity that has a useful life for more than one year and could not be converted into cash or cash equivalent within one year.
This group of assets is not reported as expenses at the time entity purchases them. Yet, they are reporting in the balance sheet at the purchasing and other related costs.
Entity charges the assets expenses based on how entity and their useful life by using the applicable depreciation methods.
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 by present in different categories based on nature, how they are used, and the depreciation rate.
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 charge during the period.
General Categories of Fixed Assets:
Entity reports fixed assets in the 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 an office building, warehouse and another similar kind of. Their useful life normally longer compared to other fixed assets.
- Computer equipment: These include laptops, desktops, servers, printers and other similar kinds of equipment. Useful life is around three to five years depending on the type of equipment.
- 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 a franchise, copyright, trademark and sometimes 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 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.
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 that we charge fixed assets.
For example, machinery and vehicles are categories into two different categories. These two types of fixed assets since 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 categorizing differently. Buildings are the property owner by the entity. For example, office buildings and warehouses owned by the entity.
However, some entities might rent offices, buildings, and warehouses for running 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 own costs. This is how leasehold improvement occurs and why they are differently categorizing from the building.
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 fixed assets 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 calculation correctly and effectively.