What Are Fixed Assets?
A fixed asset is something a business owns or uses to operate or generate income. Examples include a cash register for a retail business, or for manufacturers, machinery, production equipment, or a factory building.
Unlike a business's stock or inventory, which is purchased with the intention to sell, and expenses like utilities or rent, which are consumed on an ongoing basis, fixed assets are integral to a business’s permanent function. What makes them “fixed” is their tangibility: they are a part of the business in a physical sense, in order for the business to run.
Financial planning is necessary for fixed assets, which are tracked on a business's balance sheet. They usually depreciate in value over time, reflecting their use—‘wear and tear’—or technological obsolescence. This depreciation impacts profits and tax calculations annually.
Differences Between Fixed Assets and Current Assets
Fixed assets are more long-lived than a current, or short-term, asset. Fixed assets are not consumed, sold, or converted by a business within an accounting year.
Inventory, cash, and short-term investments are considered current assets. Unlike fixed assets, current assets tend to hold their monetary value as they are generally held briefly, or are waiting to be used, like an unpaid client invoice or raw materials for production.
The differences between fixed assets and current assets are important, as they show how a business balances long-term investments with short-term liquidity. While both are essential, they serve different purposes, the fixed assets powering the longevity of a business while current assets help them run day to day.
| Fixed Assets | Current Assets | |
|---|---|---|
| Definition | Assets purchased once and used on an ongoing basis | Assets that will be sold, or used to run business, within a year |
| Examples | Warehouses, forklifts, commercial equipment | Raw materials, finished goods inventory, prepaid expenses (e.g. rent, marketing) |
| Lifespan | More than 1 year | A year or less |
| Depreciation | Yes, except land | No, can be written off as expenses |
| Liquidity | Low, not easily converted into cash | High, can be quickly converted into cash |
Classification of Fixed Assets
While there are some assets that may be considered intangible fixed assets, such as intellectual property, in most cases fixed assets are classified as tangible assets that are held by the business for longer than a year. These may include items such as vehicles, machinery, equipment, and land.
Fixed assets frequently appear on companies’ financial statements as property, plant, and equipment (PP&E). These asset types are generally held for a long time, are tangible in nature, and are used to produce products or services. Fixed doesn’t necessarily mean stationary, however, as transportable items like vehicles and tools are also generally considered fixed assets.
Some common examples of fixed assets as they appear in accounting records and statements are:
- Land: This is generally considered a fixed asset if used for business operations, except in instances when land is held for speculation or resale.
- Leasehold improvements: Refurbishments, upgrades, or renovations to leased or rental property are considered fixed assets, and may include things like office walls, cabinetry or electrical upgrades.
- Heavy machinery and equipment: Items such as cranes, industrial assembly lines, commercial kitchen stoves, and even lawn mowers, may be considered machinery and equipment.
- Computer hardware: Computer hardware equipment such as PCs, laptops, tablets, and servers are considered fixed assets, as are items like telephones and copiers.
- Buildings and facilities: Warehouses, factories, offices, workshops, and other similar facilities that are owned by the business are key examples of fixed assets.
Importance of Fixed Asset Accounting for Organisations
Fixed assets have their own personal ‘life cycle,’ which includes at least three of these stages: purchase, depreciation, revaluation, impairment, and disposal. Keeping track of their life cycle is one of the key ways to ensure profitability for a business, especially as fixed assets are, more often than not, the biggest expense for a business.
With the depreciation of fixed assets, there can be financial reporting discrepancies. It's important that there is accurate financial reporting, as the deprecation can impact a business’s profit and loss statement—reflecting on the organisation’s net worth.
Fixed assets often offer tax benefits to organisations and businesses through the use of the depreciation of assets to deduct tax. As we know, each asset type has a different specific depreciation rule, so it should be calculated correctly in order to benefit from the tax benefits.
Correct and effective asset accounting can help to prepare a business for the repair or replacement of assets that help them run. This helps businesses budget better in other areas, as they know what the lifespan of their key ‘non-negotiable’ expenses are.
Organisations adhere to accounting regulations and standards to maintain consistency in their financial statements. These practices involve recording financial transactions, determining revenue, valuing fixed assets, and complying with tax obligations.
In Australia, the Australian Accounting Standards Board (AASB) sets the required standards, including AASB 101 Presentation of Financial Statements, which governs the format and content of general-purpose financial statements.
Globally, the International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board (IASB), provide a framework for standardised accounting practices. These standards are adopted in Australia with adjustments to align with local requirements.
Methods of Depreciation
There are multiple methods of calculating the depreciation of a fixed asset, but the process generally involves allocating the cost of a fixed asset over its useful lifetime. The depreciation reflects how its value is reduced over time due to wear and tear, obsolescence, or usage.
The four main methods of calculating depreciation are fit for different types of fixed assets:
-
Straight-Line Method
(the simplest and most commonly used method)
The asset’s cost is spread evenly across its useful life.
Depreciation Expense = (Cost – Residual Value) / Useful Life
Best for assets that consistently lose value over time, like shop fittings.
-
Diminishing (or Declining) Balance Method
(depreciates the asset more in the early years and less in the later years)
A fixed percentage is applied to the book of value of the asset each year.
Depreciation Expense = Depreciation Rate x Annual Book Value
Best for assets that lost more value initially, like vehicles.
-
Units of Production Method
(when depreciation is based on how much the asset is used)
Costs are allocated based on production or usage, such as units produced or machine hours.
Depreciation Expense = (Number of Units Produced / Life in Number of Units) x (Cost - Residual Value)
Best for manufacturing equipment or vehicles, where usage varies significantly.
-
Accelerated or Sum of Remaining Years Depreciation
(accelerates depreciation, assigning more expense in the early years)
A fraction of the assets cost is expensed based on the years remaining in its useful life.
Depreciation Expense = (Remaining Life / Sum of the Years’ Digits) x (Cost – Residual Value)
Similar to the declining balance method, it’s for assets with higher initial usage.
Thus, each of these methods can be more well suited to a particular type of asset, and the same is true for different industries. For instance, retail and wholesale businesses often use the straight-line method for consistent expense planning, while software services businesses tend to use accelerated methods to depreciate tech assets with rapid obsolescence.
The most well-suited method of depreciation depends on how an asset is used and the financial strategy used by the business. The method of depreciation should, however, reflect the asset’s accrual decline in value. Moreover, businesses should use consistent methods for depreciation across similar asset classes to ensure financial reports are accurate.
Best Practices for Fixed Asset Management
Maintain a fixed asset register: recording and updating a detailed list of all fixed assets. This helps to track ownership and location while reducing the risk of items going missing or being stolen without anyone realising.
Develop an asset disposal plan: by establishing clear procedures for selling, donating, or scrapping assets at the end of their useful life, businesses can avoid unnecessary storage costs and ensure compliance with environmental and legal requirements.
Asset tracking can be easily automated with management software, and in particular fixed asset accounting software. This type of automation can help businesses track fixed assets, calculate depreciation, resulting in a more streamlined and fool-proof method for financial management.
Aside from accounting software, businesses can, and often do, have a fixed-asset accountant who is a qualified accountant. Their main role is to manage the accounting of the company’s fixed assets, ensuring compliance with relevant Australian Accounting Standards, in particular AASB 116 Property, Plant and Equipment.
Gain Enhanced Asset Oversight With NetSuite’s Fixed-Asset Accounting System
The challenges of keeping fixed-asset records accurate and up-to-date are well-known to most business owners. However, with the right tools to monitor your assets throughout their lifecycle, the process can be made much simpler.
Specialised fixed-asset accounting software is designed to automate depreciation calculations and track other essential asset details. NetSuite’s financial management platform offers real-time insights into your company’s fixed assets, making financial transactions more efficient.
Discover how NetSuite can simplify your financial management and ensure your business stays compliant.
ASC 606, constitutes the biggest accounting change in over a decade. Learn how NetSuite enables you to streamline revenue accounting function to ensure compliance with current and future guidelines.
Claim Guide Now(opens in new tab)Fixed Asset Accounting Basics FAQs
What is a fixed asset in accounting?
In accounting terms, a fixed asset is something a business owns that it uses to operate and is expected to be kept long-term (more than one financial year). Unlike current assets like stock, fixed assets aren’t meant for resale but to help businesses run and generate revenue.
What is the journal entry for a fixed asset?
When a fixed asset is purchased, the fixed asset journal entry reflects the cost of acquiring it. There are two types of entry needed: debit and credit. Debit is a fixed asset account for the thing purchased (e.g., machinery, vehicles). The credit entry is the bank or accounts payable - showing that you have paid for the asset.
What are 10 examples of fixed assets?
- Real Estate (e.g., factories, retail stores).
- Machinery (e.g., production machines).
- Vehicles (e.g., delivery vans).
- Furniture (e.g., office chairs).
- IT equipment (e.g., Laptops, servers).
- Land (for future development).
- Tools (e.g., hand tools).
- Leasehold improvements (e.g., shop upgrades).
- Patents (for proprietary processes or software).
- Software (company-owned systems or licences).
What are the three types of fixed assets?
Three common examples of fixed assets as they appear in accounting records and statements are heavy machinery and equipment, computer hardware, and buildings and facilities. All of these items are generally held for a long time, are tangible in nature, and are used to produce products or services.
