Assets tend to play a vital role in ensuring profitability for a business venture. In a broader sense, assets can be categorised as the ‘receivables’ or the income generated.
Fixed assets form one of the important asset classes and tend to help business owners to keep their venture afloat. Notably, the treatment of fixed asset accounting is considered essential for the financial analysis of a business firm.
What is Fixed Asset?
As per the fixed assets definition, any tangible property or equipment that a firm uses for its income-generating operation can be categorised as this asset.
Such resources cannot be readily converted into cash or cash equivalent. Further, they cannot be exhausted or sold easily in a given accounting year.
Typically, real estate, trademarks, patents, machinery, delivery vehicle, stock, operational equipment, etc. are among the most common fixed assets examples.
Types of Fixed Asset
There are mainly two types of fixed assets. Let’s take a quick look at them -
Tangible Assets
The said fixed asset comprises resources which have a physical form. Notably, most resources falling under this category are subjected to depreciation. For example, buildings, machinery and inventory are among the most popular tangible fixed assets.
Intangible Assets
This category of fixed assets consists of those resources which do not have a physical form. It must be noted that the calculation of intangible assets is comparatively more challenging than tangible assets. For instance, it is quite difficult to quantify a company’s current brand image in terms of money. Some of the common examples of intangible assets include copyrights, patents, goodwill, brand image, etc.
Test your skill: which fixed assets’ value would be easier to calculate in a financial year?
Factory building
b. Company’s market goodwill
Importance of Fixed Asset
Fixed assets are considered to be an integral part of fixed capital-oriented firms which rely heavily on plant, property and manufacturing equipment.
Let’s find out the reasons which make fixed assets so important in a business setup.
They help to calculate a company’s net value in a financial year.
Aid in the process of income generation.
Form a significant share of an organisation’s total assets serving as a potent source of money.
The cost of fixed assets tends to influence a firm’s auditing and accounting endeavours.
Fixed asset accounting helps investors decide whether a firm is profitable enough for investment or not.
The durability of fixed assets also influences a firm’s frequent demand for workforce and other resources.
Enable formulation of an accurate financial report by facilitating financial analysis.
Regardless of its important role, fixed assets also have its share of flaws. For example, depreciation and difference in valuation leading to fluctuating fixed asset accounting are among the most common flaws of this asset class. Find out more about the shortcomings of fixed assets from our learning App!
Fixed Assets and Depreciation
Durability is a significant feature of fixed assets. However, with prolonged use, such resources begin to depreciate as the assets begin to degrade in terms of efficiency and productivity. Generally, factors like acquisition cost, salvage value and shelf life or economic life affect the depreciation value of fixed assets.
Such values directly influence fixed asset accounting valuation in a company’s balance sheet. Several methods can be used to calculate the depreciation value of fixed assets. However, the Straight Line Method and the Written Down Value method are the most widely used methods of calculating the depreciation of fixed assets.
Which of the two methods do you normally apply to calculate the depreciation value?
Fixed Asset Accounting
Fixed asset accounting treatment is given due importance in accounting as it is an integral component for evaluating a firm’s worth, sales and revenue. A firm’s fixed assets are reported in its balance sheet under the non-current asset section and are described as plant, property and equipment (PPE).
Notably, all fixed assets except land would depreciate in their value. The total value of depreciation by the end of a financial year is reported under the fixed assets list section of PPE.
Fixed Asset and Accounting Ratio
This ratio serves as a measure of the efficiency with which a company uses its real property and other facilities. It is also known as the fixed asset turnover ratio, and it helps to measure a company’s ability to repay its debt and other financial obligations through its share of fixed assets.
Typically, the fixed asset coverage ratio shows the relationship between a company’s fixed assets’ and net sales. Mostly, a company with a higher FARC is preferred over others. It also tends to have a favourable impact on a firm’s future earnings and valuation of its corporate stocks. Here’s how the fixed asset coverage ratio formula is expressed -
FARC = (Net sales) / (Current average value of fixed assets)
Fixed Asset versus Liquid Assets
Check out the table below to find out the differences between fixed assets and liquid assets –
These topics cover the fundamentals of fixed assets accounting and offer a fair idea about it. However, if you wish to gain in-depth knowledge about the various aspects of fixed assets, you can refer to Vedantu App and browse through related topics.
Similarly, join Vedantu’s online classes and strengthen your grasp of the subject in a much effective way.
FAQs on Fixed Assets
1. What are Fixed Assets?
Fixed asset makes up the class of assets which comprise of resources which cannot be readily converted into cash and are used for a long time. Plots, manufacturing equipment, property, copyright, etc. come under fixed assets.
2. Types of Fixed Assets
Tangible fixed assets, which include resources that can be touched or has a physical entity—examples: machinery, stock, land, etc. Intangible fixed assets, which include resources without a physical entity - example: goodwill, brand image, etc.
3. How is Net Fixed Asset Calculated?
Net Fixed Assets = Total Fixed Assets – Total Depreciation
