Fixed assets

What are fixed assets?

A fixed asset is a long-term tangible piece of property or equipment that a company owns and uses in its business. Fixed assets are not intended for sale in the normal course of business but are instead held for use in the production or supply of goods or services or for rental to others. They are also known as non-current assets or as property, plant and equipment (PP&E).

How are fixed assets classified?

There are two primary ways in which fixed assets can be classified: by their physical characteristics, and by their use.

assets are classified by their physical characteristics as either land, buildings, machinery, equipment, vehicles, or furnishings. Land is a permanent asset that cannot be depreciated. Buildings include both office buildings and manufacturing facilities. Machinery and equipment are used in manufacturing, while vehicles are used for transportation. Furnishings are used in both office and manufacturing settings.

Fixed assets are also classified by their use as either productive or non-productive. Productive assets are those that are used directly in the production of goods or services, such as manufacturing equipment. Non-productive assets are those that are not used directly in production, but are instead used in the administration or support of production, such as office furniture.

What are the characteristics of fixed assets?

Fixed assets share a number of characteristics that set them apart from other types of assets. Firstly, they are long-term assets, meaning that they are not expected to be converted to cash within one year. Secondly, they are tangible assets, meaning that they have a physical form that can be seen and touched. Thirdly, they are fixed assets, meaning that they are not intended for sale in the normal course of business. Fourthly, they are used in the production or supply of goods or services or for rental to others. Fifthly, they are subject to depreciation. Sixthly, they have a limited useful life. Seventhly, they are not easily converted to cash. Eighthly, they are often financed with long-term debt. Ninthly, they often require specialised skills and knowledge to operate. Finally, they often have a significant impact on the company's competitive advantage.

How are fixed assets valued?

Fixed assets are typically valued using one of three methods: the cost method, the market value method, or the income method. The cost method values assets at their historical cost, which is the amount paid to acquire them. The market value method values assets at their current market value, which is the amount that would be paid to acquire them on the open market. The income method values assets at their present value, which is the amount that would be paid to acquire them if their future income were discounted to its present value.

The choice of valuation method will depend on a number of factors, including the type of asset being valued, the purpose of the valuation, the availability of data, and the assumptions made about the future.

The cost method is the most commonly used method for valuing fixed assets. It is simple to calculate and is generally accepted by accounting standards. The market value method is more complex and is less commonly used. The income method is the most complex and is rarely used.

What are the methods of depreciation?

Depreciation is the process of allocating the cost of a fixed asset over its useful life. The three most common methods of depreciation are the straight-line method, the declining balance method, and the sum-of-the-years'-digits method.

The straight-line method is the simplest and most commonly used method. It allocates an equal amount of depreciation expense to each year of the asset's useful life. The declining balance method allocates a larger amount of depreciation expense to the early years of the asset's life and a smaller amount to the later years. The sum-of-the-years'-digits method allocates a larger amount of depreciation expense to the early years of the asset's life and a smaller amount to the later years.

The choice of depreciation method will depend on a number of factors, including the type of asset being depreciated, the purpose of the depreciation, the availability of data, and the assumptions made about the future.

The straight-line method is the most commonly used method for depreciating fixed assets. It is simple to calculate and is generally accepted by accounting standards. The declining balance method is more complex and is less commonly used. The sum-of-the-years'-digits method is the most complex and is rarely used.

What are the tax implications of fixed assets?

The tax implications of fixed assets will depend on the country in which the company is located and the tax laws of that country. In general, however, companies are able to deduct the cost of their fixed assets from their taxable income. This deduction is known as depreciation.

The amount of depreciation that can be deducted each year will depend on the depreciation method that is used. The straight-line method allows for a constant deduction each year, while the declining balance method allows for a larger deduction in the early years and a smaller deduction in the later years. The sum-of-the-years'-digits method allows for a larger deduction in the early years and a smaller deduction in the later years.

The tax implications of fixed assets can be significant, as they can reduce a company's taxable income and therefore its tax liability. For this reason, it is important for companies to carefully consider the tax implications of their fixed assets before making any decisions.

What are some common examples of fixed assets?

Some common examples of fixed assets include land, buildings, machinery, equipment, vehicles, and furnishings.

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