Fixed Assets

Fixed assets are long-term tangible or intangible resources that a business owns and uses in its operations to generate income, typically not expected to be converted into cash within a year. These assets are essential for running a business and are recorded on the balance sheet at their original cost minus accumulated depreciation (for tangible assets).

Types of Fixed Assets

• Tangible Fixed Assets: Physical items such as land, buildings, machinery, vehicles, and equipment.
• Intangible Fixed Assets: Non-physical items such as patents, trademarks, and goodwill.

Importance of Fixed Assets

• They are crucial for production and operational efficiency.
• Fixed assets can also appreciate in value, contributing to the overall value of the business.
• They help in securing financing, as lenders consider fixed assets as collateral.

Example of Fixed Assets

Consider a manufacturing company that owns a factory. The factory building, machinery, and equipment used in the production process are all classified as fixed assets.

Calculation of Fixed Assets

To calculate the value of fixed assets, you generally consider the purchase price, plus any additional costs necessary to prepare the asset for use (like shipping or installation), and then subtract accumulated depreciation over time. The formula for calculating the net book value of a fixed asset is:

Net Book Value = Cost of Asset – Accumulated Depreciation

Example Calculation

Let’s say the company purchased machinery for $100,000. After 5 years of use, the total accumulated depreciation on the machinery amounts to $30,000.

Using the formula:

Net Book Value = $100,000 – $30,000

The net book value of the machinery would be:

Net Book Value = $70,000

This means that the machinery is currently valued at $70,000 on the company’s balance sheet.

In summary, fixed assets play a vital role in a business’s operations and financial health, providing both utility and potential value appreciation over time.