Fixed assets, also known as non-current assets or long-term assets, are tangible or intangible resources owned by a business that are used in its operations to generate income over an extended period—typically more than one year. These assets are not intended for resale in the normal course of business and are essential for the production of goods, delivery of services, or administrative functions.
1. Characteristics of Fixed Assets
- Long-Term Use: Expected to be used in operations for more than one financial year.
- Not for Resale: Held for productive use rather than trading or short-term sale.
- Depreciated or Amortized: Their value is gradually written off over their useful life (except land, which is not depreciated).
- Capital Expenditure: Acquired through capital investment rather than as day-to-day operational expenses.
2. Types of Fixed Assets
A. Tangible Fixed Assets
- Assets with physical substance.
- Examples: Land, buildings, machinery, vehicles, office equipment.
B. Intangible Fixed Assets
- Assets without physical substance but with identifiable value.
- Examples: Patents, trademarks, goodwill, copyrights, software licenses.
3. Examples of Fixed Assets
- Manufacturing Equipment: Used in the production process over many years.
- Buildings and Warehouses: Provide operational space for business activities.
- Vehicles: Used for transportation and logistics.
- IT Infrastructure: Computers, servers, and network systems.
- Intellectual Property: Patents and trademarks that generate long-term revenue.
4. Accounting Treatment of Fixed Assets
- Initial Recognition: Recorded at cost, including purchase price, delivery, installation, and preparation expenses.
- Depreciation: Tangible fixed assets are depreciated systematically to allocate cost over their useful life.
- Amortization: Intangible fixed assets are amortized if they have a finite useful life.
- Impairment: Assets are tested for impairment if there’s an indication that their value has fallen below carrying amount.
5. Importance of Fixed Assets in Business
- Support Business Operations: Provide the tools, facilities, and technology needed for day-to-day functioning.
- Capital Investment: Reflect long-term financial commitment and planning.
- Creditworthiness: Strong fixed asset base enhances borrowing capacity and investor confidence.
- Valuation and Reporting: Accurate recording affects the balance sheet and overall financial health of a company.
Fixed Assets as the Foundation of Business Infrastructure
Fixed assets are vital components of a business’s infrastructure, enabling long-term productivity and growth. Their acquisition, valuation, and management require strategic planning and accurate accounting. Whether physical or intangible, fixed assets provide enduring value and form the backbone of most enterprise operations.