What is a Fixed Asset?

A fixed asset can be defined as a physical, long-term resource owned by a business entity that it uses to earn revenue and not something it intends to sell or convert into cash in the coming year. Examples of fixed assets include buildings, machines, vehicles, computers, and furniture. As fixed assets give value to an entity over more than one accounting period, they are classified as balance sheet accounts and depreciated over time, not expensed in full in the first year.

In accounting literature, fixed assets are referred to as property, plant, and equipment (PP&E), or capital assets, and these are synonymous with fixed assets.

Fixed Asset Formula

Here, 

• Total Assets is defined as the total value of all the assets belonging to the firm. 
• Current Assets are those assets that are easily convertible to cash or usable within one year. 
• Intangible Assets are non-tangible assets that possess some monetary value. 

Here is a practical example

• Total assets=  $2,500,000 
• Current assets= $900,000 
• Intangible assets= $200,000 

Fixed Assets = $2,500,000 − $900,000 − $200,000 = $1,400,000

The company holds $1,400,000 in store fixtures, buildings, and equipment. 

Another formula for calculating net fixed assets is:

Here is a practical example

For instance, where a firm has fixed assets totaling $500,000, out of which it has accumulated depreciation of $150,000:

Net Fixed Assets = $500,000 − $150,000 = $350,000

The $350,000 represents the net book value of the fixed asset.

The Importance of Fixed Asset Calculation

• Capital and investment planning: An understanding of the value of fixed assets enables an organization to determine when equipment requires replacement and to budget for capital expenses.
• Loans and investor assessments: Net fixed assets are used by lenders and investors to determine the worth of the business as collateral and the degree of capital intensity in the business.
• Financial reporting: Accurate calculation of fixed assets and depreciation is required for GAAP accounting and taxation.
• Taxation: Depreciation is a real write-off, and incorrect calculations will result in over- or underpayment of taxes.

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