Question

What are fixed assets?

Answer 1

Fixed assets (also called non‑current tangible assets or property, plant and equipment) are long‑lived physical assets a business owns and uses in its operations to produce goods or services, and that are not intended for sale in the normal course of business.

Key characteristics
- Physical/tangible (buildings, machinery, vehicles, furniture, land).
- Used in operations to generate revenue, not for resale.
- Useful life longer than one accounting period (more than 12 months).
- Cost is capitalized and expensed over time (not immediately).

Common examples
- Land (not depreciated)
- Buildings and improvements
- Manufacturing equipment and machinery
- Office furniture and computers
- Company vehicles
- Leasehold improvements (amortized over the shorter of lease term or useful life)

Accounting treatment (basic)
- Initial measurement: recorded at cost (purchase price plus directly attributable costs to get the asset ready for use).
- Subsequent measurement: cost less accumulated depreciation and impairment losses (under most GAAP/IFRS). Land is carried at cost and not depreciated.
- Depreciation: systematic allocation of an asset’s cost over its useful life (methods: straight‑line, declining balance, units‑of‑production).
- Impairment: if the recoverable amount falls below carrying value, recognize an impairment loss.
- Disposal: remove the asset and accumulated depreciation from books; recognize gain or loss on disposal.

Simple journal examples
- Purchase: Dr Fixed Asset (cost) / Cr Cash/accounts payable
- Depreciation: Dr Depreciation Expense / Cr Accumulated Depreciation
- Disposal (if sold): Dr Cash / Dr Accumulated Depreciation / Cr Fixed Asset; recognize any difference as gain or loss

Other practical points
- Businesses often set a capitalization threshold (minimum cost to capitalize).
- Regularly review useful lives, residual values, and impairment indicators.
- Fixed assets affect key ratios (fixed‑asset turnover, return on assets) and capital budgeting decisions.

If you want, I can show a numerical example of depreciation, explain specific depreciation methods, or discuss how fixed assets are treated differently under IFRS vs US GAAP.