A fixed asset is an item which a business purchases and uses to generate its income.
What is a Fixed Asset?
Unlike an asset like stock which you may buy to sell onto customers, a fixed asset is an overhead which you buy to run your business. A fixed asset however is not classified as an overhead because it will last for more than one year.
Examples of a Fixed Asset
- Computers & Laptops;
- Office furniture;
- Equipment and machinery which the business purchases to generate its income;
- Office improvements.
Fixed Asset Example 1
A business takes on a new employee which means they need to buy a new laptop. The laptop will last more than one year so is classified as a fixed asset.
Fixed Asset Example 2
A photographer is sets up a new business. The photographer buys new camera and lighting equipment. This is essential to generate income. The new camera and equipment are all fixed assets.
Fixed Asset Example 3
A distribution business 10,000 units of stock from a supplier and storage for the new stock to be installed in its warehouse. The 10,000 units of stock are not a fixed asset since they will be sold onto customer. The new storage is a fixed asset since the business will use this for years to come.
Fixed Assets and Financial Statements
Fixed assets are shown on your balance sheet with a fixed asset note in the accounts to add more detail. Here is an example of each:
How to Work out the Cost of a Fixed Asset
The cost of a fixed asset is its cost plus amounts paid to get the asset installed and usable. These are costs like:
- Purchase price;
- Delivery costs;
In Fixed Asset Example 3 the cost of the storage would be:
- The cost of the storage plus;
- Any installation costs.