What Is Fixed Asset? (Updated in 2023)

It’s been a few years since you are running this business. You are about to end this financial year and now you want to know – What is my actual business worth?

Most small business owners consider only revenue while assessing their business worth. However, they rarely consider one fundamental thing in the calculation – Fixed Assets. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. It is a critical component for evaluating your business valuation.

In case you don’t know the definite asset value, your financial accounting will be incomplete and it won’t give you a real picture of your business.

In this article, we’ll cover what is fixed asset, examples of it, various types of it, how it is calculated, and much more.

 

What Is A Fixed Asset?

A fixed asset is a long-term part of a property that a company possesses and utilizes in the generation of its revenue and is not anticipated that would be devoured or consumed into cash in the coming next year. A typical case of fixed assets is a producer’s plant resources, for example, its structures and hardware. The word “fix” indicates that these assets won’t be sold in the current bookkeeping year.

Let’s consider that ABC firm plans to purchase an office worth 20 lakhs rupees. The building has a physical shape, will last longer than a year, and creates income, making it a fixed asset. Thus ABC firm will now have a place from where they can maintain their business operation and are solely responsible for the building as well.

Fixed assets additionally incorporate any property that the organization doesn’t sell directly to the customer. This can be furniture, engine vehicles, PCs, and much more. Let’s assume it cost around five lakhs. Thus, ABC firm acquired a fixed asset worth Rs. 25 lakhs, and this will also reflect in their balance sheet. This fixed asset is useful in calculating the overall revenue of the company.

Importance of Fixed Assets

Detailed documentation of an organization’s capital adds to the understanding of the financial well-being and estimation of that business. Data including fixed assets and depreciation is additionally utilized by potential financial specialists when they are thinking about whether an organization is a profitable or non-profitable firm. While deciding the estimation of a fixed asset, the strategy for depreciation must be considered.

Learn more about depreciation.

Since the value of the assets depreciates as it is utilized, as they ages, or as the latest models are presented, it is critical for a firm to enlist and track depreciation from the time of procurement. Fixed assets are incorporated into the asset report at their initial expense, and after that depreciation all through their life until they are sold, supplanted on the accounting report at their residual esteem.

Accounting For Fixed Asset

If your business has fixed assets, sound accounting standards can fill in as a manual for properly representing these long-haul goods on your bookkeeping records. Particular exchanges influence capital to incorporate the buy, revaluation, devaluation, and sale of the asset. This trade is vital to the exactness of your business’s financial records and reports.

Good accounting software can help you record it easily.

 

What is the Fixed Asset Turnover Ratio?

Fixed assets turnover proportion is an activity proportion that measures how effectively an organization is using its fixed resources in producing income. Financial specialists utilize this equation to see how well the organization is using its devices and equipment to produce sales. This idea is imperative to financial specialists since they need to have the capacity to gauge the exact profit of their venture.

Check this formula:

Fixed Assets Turnover Ratio = Net Revenue / Aggregate Fixed Assets
Where Net Revenue = Gross Revenue – Sales Return
Aggregate Fixed Assets = Fixed Assets – Total Depreciation
For example, consider the above example of an ABC firm with a fixed asset worth 25 lakhs and the depreciating cost is five lakhs yearly. Consider their net revenue is 50 lakhs. If we calculate the fixed assets turnover ratio for ABC firm, it comes out to be 2.5. This ratio is considered a critical factor for investors.

 

Types of Fixed Asset

Fixed assets are classified into two main types: Tangible and Intangible Assets. Let’s look into these two in detail.

Tangible Assets

These incorporate things, for example, buildings, land, hardware, various equipment, vehicles, furniture, and much more. Think about your tangible resources as things you need to maintain your business. To value them, you begin with what you obtained or rented them for and after that apply the fitting depreciation strategies to diminish their value.

Some fixed assets, for example, land or structures may appreciate and not depreciate in long tenure. You need to consider this factor as well in your balance sheet.

 

Intangible Assets

These can incorporate goodwill, licenses, registered or trademarked names, and even phone numbers, any innovation, and websites if you ever plan to sell. For assets such as phone numbers and trademarked or patented things, it’s somewhat harder to decide the value.

Goodwill is an elusive resource, and this kind of asset is simpler to calculate by finding the difference between an organization’s actual cost and the cost at which it is sold or purchased. Most of the other intangible resources are hard to estimate.

 

What is a Current Asset?

A Current asset is a money or any other resource that will swing to cash within a year from the date it was included in the organization’s bookkeeping record. If an organization has a working cycle that is larger than one year, a resource that will turn to cash at the length of its operating cycle is considered to be a current asset.

Current assets are for the most part listed first on an organization’s accounting report and will be introduced at the request of liquidity. That implies they will show up in the accompanying order: money which incorporates cash, financial records, little money, transitory speculations, debt claims, stock, supplies, and prepaid costs. Supplies and prepaid costs won’t be changed to cash.

It is essential that the measure of each current resource not be exaggerated. For instance, records of sales, temporary investments, and inventories ought to have calculated accounts so that the sums announced won’t be greater than the sums that will be received when the resource turns to cash. Current assets are additionally alluded to as short-term resources.

 

Commonly Asked Questions On Fixed Assets

Let’s have a glance at some of the FAQs that many business owners have.

1) Is the cost of buildings, machinery, and land a fixed cost?
Yes, they are considered fixed cost.

2) Are insurance premiums considered a fixed cost?
The cost of the premiums for an organization’s property insurance is probably going to be fixed.

3) What is reported as property, plant, and equipment?
Hardware, vehicles, furniture, Land, and Structure are utilized as a part of the business.

4) What are concurrent and fixed assets and how do they differ from each other?
A noncurrent asset contains fixed assets. They are typically used in the balance sheet of the property report as property, plant, and hardware.

5) What is the current ratio?
It is a financial ratio that demonstrates the extent of existing resources for current liabilities.

6) Is a money market account a fixed asset or a current asset?
It is a current asset unless it is confined for a long-term reason. It is mostly considered a short-term asset for any organization.

 

Final Words

Although many entrepreneurs have an unclear idea of what their company’s worth is, most are just speculating – and after some time, such mystery can prove costly. Thus it is worth knowing the total asset your business is holding.

It is highly recommended to take advice from your accountant while calculating the value of fixed assets. If you want to manage it on your own, you can try ProfitBooks accounting software.

Please free to share your feedback or queries in the comments section below.

 

Also, Read
What is depreciation
How to set salary as a business owner
How to write effective invoice terms