Fixed Assets

Fixed assets are the tangible, long-term resources a business owns and uses in its operations rather than holds for quick resale, typically for more than one year. Land, buildings, machinery, vehicles, computer equipment and office furniture are all common examples. They sit opposite current assets on the balance sheet, and the distinction between the two categories is about the role and time horizon of the asset, not its size or value — a business's most expensive single item is very often a fixed asset simply because it is also the thing the business expects to use for years rather than sell quickly.

Fixed assets are usually grouped by type: land, which is never depreciated because it does not wear out or become obsolete the way other assets do; buildings and leasehold improvements; plant, machinery and equipment used directly in production; vehicles; and furniture, fixtures and office or IT equipment. Some businesses also carry construction in progress as a separate fixed-asset line, representing capital projects that are not yet finished and in use, which is why it is excluded from depreciation until the asset is placed into service.

Fixed assets are recorded initially at their full acquisition cost, including the purchase price plus costs needed to get the asset ready for use, such as delivery, installation and site preparation. That cost is then reduced over time through depreciation, which spreads the expense of the asset across the years it is expected to be useful rather than recognising the full cost in the year it was bought. The balance sheet shows fixed assets net of accumulated depreciation, so the figure reported is the asset's remaining book value, not what it originally cost or what it could be sold for today.

Depreciation is a scheduled, predictable reduction in a fixed asset's book value based on an estimated useful life, but it is not the only way a fixed asset's value can fall. If an asset's recoverable value drops below its book value for reasons outside the normal depreciation schedule — obsolescence, physical damage, or a sharp drop in demand for what it produces — the company must record an impairment charge to bring the asset down to its true recoverable value immediately, rather than waiting for depreciation to catch up over several more years.

Buying or improving a fixed asset is capital expenditure, reported in the investing section of the cash flow statement rather than as an immediate expense on the income statement, which is why a company can be spending heavily on new equipment while still reporting healthy profits — the cash outflow and the profit-statement expense happen on two different timelines. Analysts track fixed-asset spending closely because it signals how much a business is investing in its own future capacity, and compare it against depreciation to judge whether a company is merely maintaining its existing asset base or genuinely growing it.

Businesses with a meaningful amount of fixed assets maintain a fixed asset register, a detailed record of every individual asset, its original cost, accumulated depreciation, and remaining book value, which is reconciled periodically against the physical assets actually in use to catch items that have been scrapped, lost or sold without being properly removed from the books. When a fixed asset is sold or retired, the business removes both its cost and its accumulated depreciation from the records and recognises a gain or loss equal to the difference between any sale proceeds received and the asset's remaining book value at the time. A fixed asset register that is not kept up to date is a common source of financial statement errors, since it is easy for an asset that has physically disappeared from a company's operations to keep sitting, quietly overstated, on the balance sheet for years before anyone notices.