Meaning and definition of fixed assets
A fixed asset can be defined as a long-term tangible property piece owned by a firm and used for the purpose of income-generation. A fixed asset is not expected to be consumed or converted into cash before a time period of one year. Fixed assets are, sometimes, as a group, referred as “plant”. Some good examples of fixed assets include real estate, buildings, equipment, and furniture. However, intangible long-term assets like patents and trademarks are not treated as fixed assets but are referred as “fixed intangible assets”.
Reflecting changing value of fixed assets in a company’s accounts
The business obtains several years’ extended benefits from a fixed asset. For instance, a company can use a single piece of production machinery for several years, while a company owned motor car used by a salesman features, probably, a shorter useful life. By accepting the fact about short and limited life of a fixed asset, it becomes essential for the business accounts to recognize the benefits of fixed assets for it is consumed over many years.
Relevant cost of a fixed asset
The cost of a fixed asset comprises of all amounts incurred in the acquisition of assets and any amounts that can be attributable directly to bringing the asset into running condition. The directly attributable costs include:
- Cost of delivery
- Costs related with the acquisition of assets, like import duty and stamp duty
- Costs incurred while preparing the installation site for the asset
- Professional fees, like architects’ fees and legal fees
The useful life of a fixed asset
A fixed asset features an economic life in addition to having a physical life. Majority of fixed assets undergo physical deterioration due to usage and passage of time. Although physical life of an asset can be extended through care and maintenance, but it will, eventually, reach a stage where the benefits have been exhausted. Also, a fixed asset also has an economic life which is determined by factors like changes in demand and technological progress. Instead of potential physical life, the estimated economic life is used for calculating depreciation on a fixed asset.