Fixed Asset - Explained
What is a Fixed Asset?
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Table of ContentsWhat is a Fixed Asset?How is a Fixed Asset Used?Examples of Fixed AssetsDepreciation of Fixed AssetsImportance of Fixed AssetsAcademic Research on Fixed Assets
What is a Fixed Asset?
Tangible assets and properties that are owned by a company and generates income for the company are called fixed assets. These assets are tangible and have a long life-span in that they cannot be easily converted into cash. Examples of fixed assets are properties, equipment, plant, land, machinery and facilities. Fixed asset generated income for company, their useful life is more than a year, unlike current assets or liquid assets.
How is a Fixed Asset Used?
One major difference between current assets and fixed assets is the useful life. While current assets have useful lives of less than a year, fixed assets have useful lives of more than a year. Fixed assets are also non-current assets, they are not easily converted to cash, the company uses its non-current assets to generate more revenue and ruins its business operations. Every company has two types of assets, current and non-current assets. Fixed assets as a category of non-current assets are assets that their useful lives cannot expire within a year, these assets are important for running the operations of the business. Once a fixed asset has been used by a company for its full life-span, it is disposed. This can be by selling it off or leasing it to another party in exchange for cash. When a company buys a fixed asset, it is recorded as cash outflow on the company's cash flow statement but when the company sells the fixed asset, it becomes a cash inflow. However, not all fixed assets can be easily sold after they have been used for a long time, some assets become old and not useful for any buyer, in this situation, the company disposes of the asset without any cash compensation. Also, some fixed assets at the point of being disposed of are broken into pieces and sold to interested purchasers, because as a whole, there might be no demand for it.
Examples of Fixed Assets
The common examples of fixed assets are, land, plant, equipment and machinery, building and facility, software, and vehicles. All these assets cannot be used up or sold within the accounting year, the company uses them for more than a year. A business space in which a company carries out its business operations can also be regarded as a fixed asset.
Depreciation of Fixed Assets
The more fixed assets are being used for a company's production, the more they depreciate in value. Hence, sine all fixed assets are long-term tangible assets owned by a company, they value decreases as they increase in the time of usage or age. This is why at the time of disposal, most fixed assets are not sold at the value at which they were purchased. They are sold at lesser values. The way an asset is put to use also determines how much of depreciation it will experience. Nevertheless, many fixed assets depreciate and are sold below their book value at disposal period. The only exception is natural resources such as land that does not depreciate in value.
Importance of Fixed Assets
Whether it is a small or big company, the importance of fixed assets to the growth and expansion of the company cannot be overemphasized. Fixed assets are of utmost importance to companies that are into manufacturing of goods or products, in fact, it will be impossible to manufacture products without the availability of facility, equipment and machinery and other necessary assets. Furthermore, fixed assets are important in determining the financial health and solvency of a company. Investors and analysts measure the economic wellness of a company through the combination of all assets that the company has.