Understanding fixed assets

Definition

Fixed assets are the physical items a business keeps to do the work for more than a year. On the books, they are assets, not inventory and not an expense on the day you buy them.

The cost sits on the Balance Sheet while the item is in use. Depreciation later moves a slice of that cost to the profit and loss statement.

A landscaper's mower, a baker's oven, and a dentist's chair all belong here. Goods waiting on a shelf for the next customer do not.

These balances are the items themselves, recorded at what they cost. They are not cash, and they are not the related depreciation expense.

Where it shows up

Balance Sheet: Located below current assets, with the long-lived items.

P&L: Related to depreciation expense over the asset's life.

Cash flow: Increases in this account, reported cash from investing activities decreases.

See also: Property Plant And Equipment · Accumulated Depreciation · Fixed Asset Register

When you look at your Balance Sheet, fixed assets sit below current assets, with the other non-current assets. Many packs label the group property, plant, and equipment, often shown net of accumulated depreciation.

A high total can mean trucks, machines, or a building. A low total can mean the business rents what it uses, or that older items are mostly worn down on the books.

The profit and loss statement does not list this account as a line. Depreciation expense is the related charge while the asset stays on the Balance Sheet.

On the Statement of Cash Flows, buying a long-lived item is an investing outflow. Cash falls, this account rises, and the P&L does not take the full cost that day.

How it works

A purchase lands here when the item will serve more than a year and it passes the capitalization threshold. A $20 hand trowel is usually an expense; an $8,000 mower is not.

You debit this account and credit cash, or accounts payable if you bought on credit. The item is now an asset, even when cash has already left.

The cost stays until you sell or retire the item. You do not drop the whole purchase onto the P&L in week one.

Each period, depreciation expense takes a slice of cost. That slice credits accumulated depreciation, a contra-asset, rather than wiping the original cost off this line.

The original cost usually remains visible. Net book value is that cost minus the accumulated depreciation.

Keep a register of each item, its cost, and its life. A mower still in the trailer should be on that list; a mower that was scrapped should not.

When the item leaves, you remove both the original cost and the accumulated depreciation. Any cash from a sale, and any gain or loss, are recorded at the same time.

The method you pick for spreading cost is a separate choice. This account still holds the purchase until the item is gone.

Example

A landscaper buys an $8,000 commercial mower to keep for years. The dealer is paid in cash the same day.

The landscaper records:

Debit: Fixed assets $8,000

Credit: Cash $8,000

Fixed assets go up by $8,000, and cash goes down by $8,000. The P&L does not show an $8,000 expense that day.

The Balance Sheet is the same size, with a different mix of assets. If the mower had been bought on account, the credit would have been accounts payable instead.

Depreciation will spread the $8,000 over the years the mower is used. Those later entries do not change the original cost sitting here.

Common mix-ups

Fixed assets are not inventory. Inventory is bought to resell or to make goods for sale; a mower is bought to cut lawns for years.

Buying a mower is not the same as recording the full expense. Cash leaves now; the expense arrives later as depreciation.

Fixed assets are not the same as net book value. This account holds cost; net book value is cost minus the depreciation stacked against it.

Related terms

• Property Plant And Equipment: The balance-sheet grouping for land, buildings, machinery, vehicles, and equipment.
• Fixed Asset Register: The subledger listing every capitalized asset the business owns.
• Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Capitalization Policy: The written dollar threshold and rules for recording a purchase as an asset instead of an expense.
• Capital Expenditures: Spending to buy or improve long-lived assets.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.