Fixed assets are the asset which a company holds for a long period of time and use it to manage its operations and conduct business. These assets are not sold in the current financial year. For instance, let’s say a company buys a building worth Rs.50 lakh for its operations. Now, the company uses this building to further its business and generate revenue. The total worth needs to be mentioned in the balance sheet of the company.
The term ‘fix’ is used to indicate its long term bond with the firm and not its nature. It also includes some assets which can be moved, like furniture and computers.
Types of fixed assets
Furthermore, these fixed assets are classified under 2 categories:
Tangible fixed asset
These are the things that can be touched. The company’s office, the fixtures and fitting, all constitute tangible fixed assets. Depreciation is charged for assets falling under this category.
Some assets like Land, appreciate and not depreciate. So, this should be considered while preparing the balance sheet of the firm.
Intangible fixed asset
These are the assets which can’t be touched. Like copyright, trademark, company’s website, goodwill, licenses and so on.
Goodwill is easy to calculate since it is the difference between the value at which it was bought/sold and the actual value. Other fixed assets are hard to evaluate.
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Importance of fixed asset
After the completion of the financial year, the company would have to evaluate its net worth to make sure it is progressing. This data is valid for stakeholders, owners, managers, employees, clients and many other people associated with the functioning of the company. For this, a company can calculate its cash/current assets. But what about its fixed asset?
For complete and thorough calculation of the company’s worth, fixed assets play a vital role. Fixed asset, in an accounting term, are those assets which would not be sold in the current financial year. Like the building of the company, computers owned by the firm, furniture, machinery, vehicles, all come under fixed assets.
Fixed assets accounting
In case of your company’s fixed asset, proper accounting is done to reevaluate, devaluate, sale, purchase of these assets are a necessity. Sound accounting methods are mandatory to represent these assets on your company’s balance sheet.
The tangible fixed assets of the firm depreciate while the intangible assets amortize. These assets lose value as they age. Due to factors like wear and tear, their monetary value in the market depreciates. So, a certain amount is reduced annually from the company’s asset side. This rate varies from product to product. Like in electronic appliances this rate is 50% i.e. it depreciates to 50% of its total value.
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Fixed asset turnover ratio
This is a ratio that calculates how well a company is using its fixed asset in producing income. Financial specialists use this data to calculate to know the sales done by the firm. This is an important ratio, which is used by Financial specialists to calculate the exact profit made by the firm.
The formula to calculate fixed asset turnover ratio= Net revenue/Aggregate Fixed assets.
Net revenue= Gross revenue- sales return
Aggregate Fixed assets= Fixed assets- total depreciation
The better the ratio, the better the performance by the company. The firm has to take in all the factors before coming to the conclusion as this ratio is very important to the stakeholders of the firm.
Some FAQs related to fixed asset
- Q- Are the cost of machinery, land and building a fixed asset?
- A- Yes, they constitute fixed assets
- Q- Does insurance premiums are considered a fixed asset?
- A- In the case of insurances done to a fixed asset
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- Q- What comes under property, plant, and equipment?
- A- Assets utilized as a part of the business like Hardware, furniture, vehicles, land, structure
- Q- Is the money market a fixed/current asset?
- A- This comes under current asset unless it is held for a long period of time. In most cases, it comes under the short-term asset of the company.
- Q- What’s the difference between nonconcurrent and fixed assets?
- A- All fixed assets come under noncurrent assets. In addition to fixed assets, noncurrent assets include long-term investments, deferred charges, intangible assets, and other noncurrent assets.
The company needs to be vigilant of its assets. This can affect its total worth and investor’s decision in the long run. Hence, for the company’s sake and the long term functioning of the firm, fixed assets should be checked.
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