What are fixed assets? Definition and meaning
Fixed assets are tangible assets that cannot be easily converted into cash. Examples include property, plant, and equipment (PP&E). We do not resell fixed assets as part of a company’s everyday business operations.
Fixed assets are tangible pieces of property that a company uses in the production of its income or administrative purposes.
We use fixed capital to buy fixed assets. However, many people use the two terms interchangeably.
In manufacturing businesses, we sometimes refer to them collectively as ‘plant.’ Tangible assets are those we can touch.
Fixed assets vs. current assets
The term contrasts with current assets, i.e., liquid assets. Current assets are things a business owns that it can convert into cash easily, i.e., within twelve months.
A fixed asset does not necessarily have to be ‘fixed’ in the sense of being impossible to move. A computer is a fixed asset which we can move. We can move a vehicle, which is also a fixed asset.
Fixed assets are the things a business owns that help it produce and earn money. The company does not resell them as part of everyday business activities.
Fixed assets – tangible assets
In the vast majority of cases, we only class tangible assets as fixed. However, we categorize some long-term intangible assets as fixed intangible assets. Patents and trademarks, for example, belong to this category.
Accountants define a fixed asset as an item whose useful life is longer than one reporting period. They also define it as something which exceeds a company’s minimum capitalization limit.
We do not class an inventory item as a fixed asset. This is because the buyer plans on either reselling it or using it to make something else.
Fixed assets – examples
- furniture and fixtures,
- leasehold improvements,
- computer equipment, and
- computer software.
According to accountingtools.com, we initially record a fixed asset as an asset. It is then subject to the following general kinds of accounting transactions:
- periodic depreciation (tangible assets), or amortization (intangible assets,
- impairment write-downs (if the asset’s value falls below its net book value),
- disposition (as soon as we dispose of an asset).