The term fixed asset is an accounting concept.
It is a classification of certain things that a business buys and impacts:
- The bookkeeping entries that are required;
- Business profits;
- How a business gets tax relief on it;
What is a Fixed Asset?
A fixed asset is something you buy for your business that generally is kept for more than a year and is used for running the business.
For example, a self-employed gardener who buys a lawn mower will use it for a couple of years to earn money in his business.
Examples of Fixed Assets
Here are some common purchases made by small business owners that often end up classified as a fixed asset:
- Office furniture;
- Equipment and machinery;
- Office premises
- Office Improvements.
A photographer sets up a new business buying a new camera and lighting equipment. This is essential to generate income. The new camera and equipment are all fixed assets.
A distribution business 10,000 units of stock from a supplier as well as storage for it to be installed in its warehouse. The 10,000 units of stock are not a fixed asset since they will be sold onto customers. The new storage is a fixed asset since the business will use this for years to come.
How to Work out the Cost of a Fixed Asset
The cost of a fixed asset is its purchase price and anything paid to get the asset delivered, installed and usable.
In Example 3 above the cost of the storage would be:
- The cost of the storage plus;
- Any installation costs.
How Fixed Assets are Recorded
Fixed assets are recorded on the balance sheet in their own section. That ways it easy to see how much a business owns in terms of assets.
Fixed assets on the balance sheet are generally accompanied by a note in the accounts to give more detail.
Depreciation of Fixed Assets
To reflect the use and eventual depletion in the value of a fixed asset, an entry needs to be made for depreciation.
Depreciation is an accounting entry to write off the cost of a fixed asset at a set rate over a fixed period of time.
Fixed Asset Double Entries
Here are the bookkeeping double entries you’ll need when you buy and depreciate a fixed asset.
On Initial Purchase:
|Dr Fixed Assets|
|Cr Accounts payable|
If you are VAT registered, you must record your fixed asset net of VAT. You’ll be able to claim back all the VAT in one go.
|Dr Depreciation (profit and loss account)|
|Cr Fixed asset depreciation (Balance sheet)|
Updated 9 April 2019