Fixed Assets - definition & overview

In the realm of small business, the term 'Fixed Assets' holds a significant place. These are the long-term tangible pieces that a company owns and uses in the production of its income and are not expected to be consumed or converted into cash any sooner than at least one year's time. They are the backbone of any enterprise, providing the necessary infrastructure for a business to operate and generate revenue.

Fixed assets, also known as Property, Plant, and Equipment (PPE), are the bedrock upon which businesses build their operations. They are the physical and tangible goods that a company purchases to enable its operations. From the buildings that house the company to the machinery that produces its goods or the vehicles that transport them, fixed assets are an integral part of the business landscape.

Types of Fixed Assets

Fixed assets can be categorised into several types, each with its own unique characteristics and role within the business. Understanding these categories is crucial for effective asset management and financial planning.

These categories include tangible and intangible assets. Tangible assets are physical in nature, such as buildings, land, machinery, vehicles, and office equipment. These are the assets that you can physically touch and see.

Land and Buildings

Land and buildings are the most common types of fixed assets. They provide the physical space where a business operates. Whether it's a retail store, a manufacturing plant, or an office building, these assets are critical to the daily operations of a business.

Land, unlike other fixed assets, does not depreciate over time. Its value can even increase, making it a potentially profitable investment for a business. Buildings, on the other hand, depreciate over their useful life but provide a necessary space for operations.

Machinery and Equipment

Machinery and equipment are also integral fixed assets. They are the tools that a business uses to produce its goods or services. This category can include anything from manufacturing machinery to office computers.

These assets depreciate over time due to wear and tear and technological obsolescence. However, they are critical to a business's operations and often represent a significant investment.

Depreciation of Fixed Assets

Depreciation is a key concept when it comes to fixed assets. It is the method by which a company allocates the cost of a tangible asset over the periods that the asset is used. This process represents the reduction in value of an asset over time, due to elements such as wear and tear, obsolescence or decay.

Depreciation is an important aspect of accounting for fixed assets. It allows businesses to reduce the value of an asset gradually, rather than immediately recognising the full cost in the year the asset was purchased. This can have significant effects on a company's financial statements and tax liabilities.

Methods of Depreciation

There are several methods of depreciation that a business can use, each with its own benefits and drawbacks. The straight-line method is the most commonly used and involves depreciating the asset an equal amount each year over its useful life.

Other methods include the declining balance method, which involves depreciating the asset more in the early years of its life, and the units of production method, which involves depreciating the asset based on its usage or output.

Fixed Assets and Financial Statements

Fixed assets play a crucial role in a company's financial statements. They are a key component of a company's overall value and are often used by investors and creditors to assess the financial health of a business.

On the balance sheet, fixed assets are listed as property, plant, and equipment, and their value is depreciated over time. The accumulated depreciation is also listed on the balance sheet, showing the total depreciation that has been taken on the assets over their life.

Impact on Cash Flow

Fixed assets also have an impact on a company's cash flow. When a company purchases a fixed asset, it represents a cash outflow. However, because the cost of the asset is spread out over its useful life through depreciation, the impact on cash flow in the following years is lessened.

When a fixed asset is sold, it can also represent a cash inflow. However, the sale can also result in a gain or loss, depending on the sale price compared to the asset's book value.

Management of Fixed Assets

Effective management of fixed assets is crucial for any business. This involves tracking each asset, ensuring it is being used efficiently, and planning for its replacement when its useful life is over.

Asset management can also involve decisions about leasing versus buying assets, maintenance schedules, and disposal of assets. These decisions can have significant impacts on a company's financial performance and operational efficiency.

Asset Tracking

Asset tracking involves keeping a record of all the company's fixed assets and their details. This includes information such as the purchase date, cost, accumulated depreciation, and estimated useful life. Asset tracking can help a company keep track of its assets' value and plan for future capital expenditures.

Asset tracking can be done manually, but many companies now use asset management software to automate the process. This can increase accuracy and efficiency, and provide valuable insights into asset usage and performance.

Asset Utilisation

Asset utilisation involves ensuring that each asset is being used as efficiently as possible. This can involve monitoring usage and output, scheduling regular maintenance to keep the asset in good working condition, and making decisions about when to replace or upgrade the asset.

Effective asset utilisation can help a company maximise its return on investment in its fixed assets. It can also help to prevent unexpected breakdowns and disruptions to operations.

Conclusion

In conclusion, fixed assets are a fundamental part of any business. They provide the infrastructure that allows a company to operate and generate revenue. Understanding and managing these assets effectively is crucial for the financial health and operational efficiency of a business.

From acquisition and depreciation to asset management and disposal, each stage in the life of a fixed asset has significant implications for a company's financial statements and tax liabilities. Therefore, effective management of fixed assets is not just a financial necessity, but also a strategic imperative for any successful business.