What are Fixed Assets – The basics you need to know?
Fixed Assets are purchases of identifiable ‘equipment’ for long-term use by a business for use in its operations to generate revenue. They are usually kept for more than a year, normally in excess of three years, and are crucial for a business’s operations, whether it’s machinery for manufacturing or office equipment for day-to-day functions.
They need to be easily identifiable because if they are lost or brake down, they are no longer business assets, that have a value in the Balance Sheet.
Key Characteristics
Long-Term Use: Fixed assets provide value over several years.
Physical and Intangible: Most are tangible (buildings, machinery, vehicles), but intangible assets like patents or software also qualify.
Less Liquid: Fixed assets are harder to convert into cash quickly compared to current assets.
Common Types
– Property, Plant, and Equipment: Land, buildings, and equipment.
– Vehicles: Used for business transportation.
– Furniture & Fixtures: Office furniture & equipment.
– Intangible Assets: Non-physical items like patents and software.
Accounting & Depreciation
Fixed assets are listed on the balance sheet at their original cost, including purchase price and installation costs, less depreciation. Depreciation is a non-cash expense that reduces their book value over their useful lives. When sold or disposed of, the asset is removed from the balance sheet, & any gain or loss is recorded.
What is Depreciation?
Because Fixed Assets are bought to use for a long time, Accountants spread the cost over the useful life of these assets, because it would not be fair hit a single month’s profit with such a big cost. The danger doing this is that makes it difficult to compare such a month’s performance against that of other/normal months, and so impossible to see & monitor trading performance trends.
This method of spreading the cost over time is called Depreciation.
Depreciation Methods
– Straight-Line: Spreads the cost evenly across the asset’s useful life.
– Reducing Balance: Depreciates a larger amount in the earlier years.
– Units of Production: Based on the asset’s actual usage.
Tax & Funding Opportunities
Depreciation is often not tax-deductible in the UK, because HMRC have their own method for reducing taxable income for money spent on Fixed Assets called Capital Allowances. For most SME’s this means they get full tax relief on Fixed Assets in the year of purchase. Very useful in tax planning, because if you have had a good year with big profits, the tax bill can be greatly reduced by accelerating an asset purchase to pay less tax.
Fixed assets are essential long-term investments for businesses because they are usually individually identifiable assets, loans to buy them are cheaper with lower interest rates: because a loan can be secured on the asset.
A good analogy is of a Fixed Asset and how to fund one is: could you buy a house out of your monthly pay. For most people this is a big expenditure of something you need for your family to prosper. In just the same way your business has similar needs for it to continue and be efficient.
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