What Are Fixed Assets?
Fixed assets are long-term physical resources a business owns and uses in its operations, expected to provide value for more than one year. They are also called property, plant and equipment (PP&E), the formal balance sheet caption for the same category. Unlike inventory, fixed assets are not held for sale; they are the equipment used to run the business.
Examples of Fixed Assets
- Land:
the only fixed asset that is never depreciated, since it does not wear out. - Buildings:
owned facilities, warehouses, and office space. - Machinery and equipment:
production equipment, forklifts, and manufacturing lines. - Vehicles:
delivery trucks, company cars, and fleet assets. - Furniture and fixtures:
desks, shelving, and fitted installations. - Computer hardware:
servers and network infrastructure, distinct from software licences. - Leasehold improvements:
improvements made to a leased space, depreciated over the shorter of the lease term or useful life.
The line between a fixed asset and an ordinary expense is the same capitalization threshold used in the capex versus opex decision: a cost must both last beyond one year and clear the company's dollar floor to qualify.
Gross vs. Net Fixed Assets
FORMULA
Net Fixed Assets = Gross Fixed Assets − Accumulated Depreciation
Gross fixed assets is the original purchase cost, unchanged by use. Net fixed assets reflects the remaining book value after depreciation, which is what actually appears as the asset balance on the balance sheet.
EXAMPLE
A business bought equipment for $400,000 and has recorded $150,000 of accumulated depreciation against it.
Net Fixed Assets = $400,000 − $150,000 = $250,000.
The equipment could still be fully functional; the $250,000 reflects accounting book value, not market value or remaining useful life.
The Fixed Asset Turnover Ratio
FORMULA
Fixed Asset Turnover = Net Sales ÷ Average Net Fixed Assets
This measures how efficiently a business generates revenue from its fixed asset base. A manufacturer running $8,000,000 in sales against $2,000,000 in average net fixed assets has a turnover of 4, generating $4 of revenue per dollar of fixed assets.
The ratio is most meaningful compared against a company's own trend and its industry, since capital intensity varies enormously: a distributor with light physical infrastructure will show a much higher turnover than a manufacturer running heavy equipment, without either being more or less efficient.
The Fixed Asset Register
A fixed asset register is the detailed record supporting the fixed assets balance on the balance sheet, listing every individual asset with the information needed to track and depreciate it correctly.
- Asset description and ID:
a unique identifier, often tied to a physical tag on the asset. - Purchase date and cost:
the original capitalized amount, including delivery and installation where applicable. - Useful life and depreciation method:
which determines the annual depreciation charge. - Accumulated depreciation to date:
used to calculate current net book value. - Location and custodian:
particularly important for equipment that moves between sites. - Disposal information:
date and proceeds when an asset is sold, scrapped, or retired.
The register total should tie to the fixed assets balance on the trial balance every period. When it does not, the mismatch usually traces to an asset purchase that was expensed instead of capitalized, or a disposal that was never removed from the register.
How Fixed Assets Are Recorded and Depreciated
- Capitalize the purchase.
Record the full cost, including delivery and installation, as a fixed asset rather than an expense. - Determine useful life.
Estimate how many years the asset will provide benefit, often guided by IRS class life tables for tax purposes. - Choose a depreciation method.
Straight-line spreads cost evenly; accelerated methods front-load higher depreciation in early years. - Record depreciation each period.
Debit Depreciation Expense, credit Accumulated Depreciation. - Update the register.
Reflect the new accumulated depreciation and resulting net book value.
Frequently Asked Questions About Fixed Assets
1. What are fixed assets?
Fixed assets are long-term physical resources a business owns and uses in its operations, expected to provide value for more than one year, such as equipment, buildings, and vehicles. They are also called property, plant and equipment, or PP&E, on the balance sheet.
2. What are examples of fixed assets?
Land, buildings, machinery and equipment, vehicles, furniture and fixtures, computer hardware, and leasehold improvements. Land is the only fixed asset that is never depreciated, since it does not wear out over time.
3. What is the difference between gross and net fixed assets?
Gross fixed assets is the original purchase cost, unchanged by use. Net fixed assets is gross fixed assets minus accumulated depreciation, reflecting the remaining book value that actually appears on the balance sheet.
4. What is the fixed asset turnover ratio?
Fixed asset turnover equals net sales divided by average net fixed assets, measuring how efficiently a business generates revenue from its fixed asset base. It is most meaningful compared against a company's own trend and industry peers, since capital intensity varies widely by sector.
5. What is a fixed asset register?
A fixed asset register is the detailed record supporting the fixed assets balance on the balance sheet, listing every asset with its description, purchase cost, useful life, depreciation method, accumulated depreciation, and location. Its total should tie to the trial balance each period.
6. How are fixed assets recorded in accounting?
The purchase is capitalized at full cost rather than expensed, a useful life and depreciation method are assigned, and depreciation is recorded each period by debiting Depreciation Expense and crediting Accumulated Depreciation, which reduces the asset's net book value over time.
