- Fixed assets are property, real estate or equipment that is a long-lived investment.
- Both small businesses and individuals may have fixed assets in their portfolios.
- Fixed assets play a role in determining a person’s net worth or a business’s value.
Fixed assets are tangible forms of property, such as real estate, plants and equipment (for businesses) or simply property (for individuals). Unlike bank account balances or stocks, a fixed asset is not easily converted into cash.
There are many kinds of fixed assets, be they for businesses or people. These long-term investments come with different characteristics and play a unique role in measuring net worth.
Fixed asset definition
What are fixed assets? Fixed assets are tangible pieces of property or equipment owned by a business or an individual. A business’s fixed assets are likely to consist of real estate, machinery or engineering facilities they own. An individual’s fixed assets are more likely to consist of a home, land and/or valuables.
Both businesses and individuals can purchase and hold fixed assets — also known as "noncurrent assets" — in their portfolio. Some terms are more common for companies than for people, and vice versa.
|Terms Associated with Personal Fixed Assets||Terms Associated with Business Fixed Assets|
|Asset Term||Illiquid asset, non-liquid asset||Capital asset|
Fixed assets vs. current assets
The difference between fixed assets and current assets is their duration, or useful life. Fixed assets are held onto for a year or more, whereas current assets are usually used or sold by the end of one year. A fixed asset is not necessarily easy to convert to cash, but current assets can be more easily liquidated.
For example, a factory your company owns can be considered a fixed asset, given that you own it for a long period of time in order to conduct business. The raw materials you buy in order to manufacture products are current assets. In most cases, you’ll use up these assets in a year or less. If you needed access to capital quickly, these liquid assets would convert to cash faster than fixed assets.
How fixed assets work
What fixed assets are, and the role they play, differ between businesses and individuals. In general, they’re long-term, tangible assets owned by a company or person. Some long-term, tangible assets can help you generate income, whether through the manufacture of goods or through their appreciation over time, whereas others might depreciate over time. These assets might be machinery in a factory that wears with age or your cell phone, which may become sluggish compared to newer models.
Personal fixed assets
Personal fixed assets are forms of real property, such as a home or a car, that you can calculate as part of your net worth alongside your personal finances. Some personal fixed assets, like a home, could appreciate in value over time depending on unique factors, such as location and the home’s condition. Other personal fixed assets, like a car, depreciate over time and, as such, often lose value.
Business fixed assets
A business’s fixed assets are designed to generate revenue. Thus, they’re treated differently than other forms of assets or income from an accounting perspective. Forklifts, company cars or a building can all be fixed assets designed to help a business make money and end up in your financial reporting.
Fixed assets influence a business’s financial accounting statements in a few different ways.
- Balance sheet: Fixed assets are usually recorded on a balance sheet as PP&E (property, plant and equipment) on financial statements like a balance sheet. Balance sheets demonstrate a company’s “book value,” which is assets less liabilities and shareholder equity.
- Income statement: Income statements break down your profits and losses by way of all income and expenses during a selected period of time. Fixed assets may be listed as a depreciation expense on your income statement.
- Cash flow statement: A cash flow statement measures your expenditures and income during a certain period of time, helping you determine where your money is coming from and where it’s going as far as business finances are concerned. Fixed asset purchases are cash flow negative, whereas the sale of a fixed asset is cash flow positive.
Fixed asset examples
Several kinds of fixed assets exist. Fixed assets, which can consist of many different pieces of tangible property, can’t convert to cash quickly.
Examples of personal fixed assets
Personal fixed assets are items of value other than cash. Your fixed assets are equated with what you own, and are factored into your personal net worth. Personal fixed assets can consist of a variety of items, such as:
- Art collectibles
- Property or real estate
Examples of business fixed assets
A business’s fixed assets are often large-scale purchases that help increase its market value. These assets can also take several forms depending on your industry.
- Property or real estate
- Office equipment (such as computers or furnishings)
The bottom line
Fixed assets are a must for most businesses that want to generate income. The same is true for people who may want to incorporate real estate or other tangible items into their overall net worth. The value of some fixed assets can depreciate over time, however. Regardless, this property is often necessary for a potential long-term investment.
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