How do fixed assets work and why are they important?

Fixed assets refer to property, plant and equipment that a firm owns and uses in the course of its operations to generate revenue. This guide explains fixed assets and how they work in accounting.

What is a fixed asset? 

Fixed assets are physical items that your business uses regularly and on a long-term basis to generate income. Sometimes referred to as capital assets, fixed assets can be used up or sold, but are expected to be useful to your business for longer than 12 months. Because of this, you can depreciate their value.

What are net fixed assets? 

Assets lose value over time due to usage, wear and tear. Net fixed assets is the net value of your business' fixed assets, taking into account their depreciation. If you're considering selling your business, knowing the market value of your fixed assets will help you and prospective buyers value your business. 

Here's the formula for calculating net fixed assets:

Net Fixed Assets = Gross Fixed Assets – Accumulated Depreciation - Impairment Losses

• Gross fixed assets refers to the original purchase price of all your fixed assets, including additional improvements or additions you've made that improve the efficiency of the asset.

• Accumulated depreciation is the increasing depreciation of an asset up to a specific point in its operation. 

• Impairment losses happen when the market value of an asset unexpectedly drops. For example, when a fixed asset is physically damaged, becomes obsolescent or market trends impact the recoverable value (value of the asset in use versus the value when sold, whichever is higher). 

Characteristics of fixed assets

Fixed assets have some common characteristics, including:

Aid in business operations

Fixed assets are tangible resources that help your business generate income. In other words, they're assets that you use in your day to day operations to provide customers with products and services. 

High value investments 

Because fixed assets are non-current assets that help your business bring in revenue over the long term, they are typically high value investments for the company. 

Owned for longer than a year 

Compared to current assets, which have a lifespan of less than a year, fixed assets have a useful life beyond a year.

Fixed assets can be depreciated 

You can calculate depreciation on all fixed assets (except land) to account for general wear and tear. 

Examples of fixed assets

These are examples of some common fixed assets:

Warehouses/office space

Office buildings, factories and warehouses are all considered fixed assets, including parking lots, garages and office furniture.

Machinery 

Machinery or equipment used to manufacture or produce goods sold to customers are fixed assets, including work vehicles.

Land

Land or property is a fixed asset you invest in for use as part of your business operations. 

Tools 

Tools are also fixed assets. For example, a tradesperson will invest in quality tools that last many years. 

Computer hardware

Computer hardware and software are fixed assets, too – everything from payroll systems to marketing automation software and business management platforms. 

Importance of fixed assets in business

Fixed assets are important in business mainly because they help you produce products or deliver services – and ultimately earn revenue. Because of their high value, fixed assets also contribute to your company's overall value, and they can be used as collateral for financing options so you can pursue new growth opportunities.

Fixed assets on a balance sheet 

Fixed assets most commonly show on a balance sheet as property, plant and equipment (PP&E). If a fixed asset gets damaged during its lifetime, you'll need to adjust the value to reflect the decrease in market value. When the asset is sold or disposed of, the fixed asset is written off the balance sheet. 

Fixed assets on an income statement

Initially, fixed assets get capitalised on your balance sheet. Then, they steadily depreciate. This is where the income statement comes in - depreciation gets recorded on the balance sheet, income statement and cash flow statement. 

Fixed assets on a cash flow statement 

When you purchase a fixed asset, you'll record the transaction on your cash flow statement under operating cash flow from investing activities. Buying the fixed asset will show as a cash outflow. Then, when you sell it, the sale will be a cash inflow. 

Fixed assets FAQs

What is a fixed asset vs a current asset?

The major difference is that fixed assets depreciate while current assets can't. That's because current assets are used or converted to cash in the short-term (less than a year).

What is a fixed asset vs a non-current asset?

Fixed assets are non-current assets and may be tangible assets, long-term investments or intangible assets such as trademarks and intellectual property.

Is a car a fixed asset or a current asset?

A car is considered a fixed asset, not a current asset. This is because it’s considered a long-term resource (used for over 12 months) to help the business generate income. Fixed assets like cars are subject to depreciation, which is the process of allocating the cost of the asset over its useful life to reflect its wear, tear and loss of value. 

What items aren't considered fixed assets?

Items that are expected to be sold or converted to cash within 12 months aren't considered fixed assets. They're known as current assets, and include cash, inventory, cash equivalents and accounts receivable.

Which fixed assets are not depreciated?

There's one fixed asset that doesn't depreciate – land. Land has an indefinite asset life, and its value doesn't change from physical deterioration.

Fixed asset management with MYOB

MYOB Advanced Business makes managing your business assets and depreciation calculations super easy with the MYOB Advanced Fixed Assets module.  Find out more – speak to an ERP expert today.

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.