Fixed Assets – Definition and Meaning
In accounting, fixed assets are assets which cannot be converted into cash immediately. Mainly, they are tangible assets used in production having a useful life of more than one accounting period. Unlike current assets or liquid assets, fixed assets are for the purpose of deriving long-term benefits.
Example list of fixed assets that a business may own;
- Land improvement (e.g. irrigation)
- Computer equipment
- Computer software
- Office equipment
- Leasehold improvements(e.g. air conditioning)
- Intangible assets like trademarks, patents, goodwill etc.
Fixed assets are “fixed” not because of their geographical fixity. They are “fixed” in the sense that they are not completely consumed during production activities in a single accounting period.
Fixed Assets Shown in Balance Sheet
Fixed assets are shown on the “Assets” side i.e. right-hand side of the vertical balance sheet. They are shown in financial statements at their net book value, the calculation for net book value has been shown in the next section.
Related Topic – Why is depreciation not charged on land?
Net Book Value
In the balance sheet, fixed assets are recorded under Property, plant and equipment section. Although these assets are available in the production process for several accounting years, with time and usage, they depreciate, i.e. they lose value. Furthermore, fixed assets are recorded at their net book value, which is the difference between “historical cost of the asset” and “accumulated depreciation.
Net book value = Historical cost of the asset – Accumulated depreciation
Let us assume Unreal Pvt Ltd. purchases a computer for their company at a price of 30,000. The computer has a constant depreciation of 2,000 per year. So, after 3 years, the net book value of the computer will be recorded as
30,000 – (3 x 2,000) = 24,000.
Short Quiz for Self-Evaluation
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