Confused by the concept of fixed assets in accounting? Then read on! In this guide, you’ll understand what a fixed asset is, how they are classified and appear on the balance sheet along with fixed asset examples.
Table of contents
- 1. What is a Fixed Asset?
- 2. Examples of Fixed Assets
- 3. How to Calculate Fixed Asset Cost
- 4. Where are Fixed Assets on the Balance Sheet?
- 5. What is the Double Entry for the Purchase of a Fixed Asset?
- 6. What is the Double Entry for the Sale of a Fixed Asset?
- 7. Depreciation of Fixed Assets
- 8. Why Do Fixed Assets Matter in Business?
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is a Fixed Asset?
A fixed asset is something a business buys to generate income which is typically owned for a number of years. Fixed assets are classified between tangible and intangible assets, the difference being whether they have a physical presence or not.
1.1 Tangible Fixed Assets
A tangible fixed asset is a physical item owned by a business that it uses to generate income and sales. For example, a manufacturing business that buys machinery to produce goods that it sells to generate revenue would classify this equipment as a tangible fixed asset. Other examples of tangible fixed assets include land, property and vehicles.
1.2 Intangible Fixed Assets
An intangible fixed asset is a non-physical item owned by a business that is used to generate income and sales or held as investments to secure the future of the organisation. For example, a business with goodwill that arose on the purchase of the Company would be classified as an intangible fixed asset.
2. Examples of Fixed Assets
Examples of fixed assets on the balance sheet include:
- Land and buildings;
- Equipment and machinery;
- Cars and vans;
- Certain websites;
- Long term investments in shares.
3. How to Calculate Fixed Asset Cost
Fixed asset cost in the balance is the purchase price plus anything paid to get the asset delivered, installed and usable. For example, a manufacturing business that builds storage in its warehouse would capitalise the new storage as a tangible fixed asset and the asset cost would be calculated as the cost of the storage plus any installation and delivery costs.
4. Where are Fixed Assets on the Balance Sheet?
Fixed assets are shown in the first section in UK balance sheets, separated from current assets so that it is clear the total amount of fixed assets a business owns.
Fixed assets are accompanied by a note in the accounts giving more details of the type, cost, depreciation and net book values.
5. What is the Double Entry for the Purchase of a Fixed Asset?
- Dr Fixed Asset £12,500
- Dr VAT £2,500
- Cr Trade Creditors £15,000
6. What is the Double Entry for the Sale of a Fixed Asset?
Following on from the example above, the Company has charged depreciation of £3,000 and sold the fixed asset for £5,000. Here is the double-entry on the sale of a fixed asset to remove the asset from the balance sheet:
- Dr Bank £5,000
- Dr Accumulated depreciation £3,000
- Cr Fixed Assets £12,500
- Cr Profit on sale of fixed assets £4,500
7. Depreciation of Fixed Assets
Fixed assets, over time, begin to lose value* and this decrease in value needs to be reflected in the accounts using depreciation. Depreciation is the write off of fixed assets over a set period of time to reflect the use and eventual depletion in the value of the asset. Businesses can use different methods to account for depreciation depending on the type of asset such as:
- Straight-line depreciation
- Reducing balance depreciation
* special rules apply to land and property
8. Why Do Fixed Assets Matter in Business?
Fixed assets matter to a business because they generate income and therefore profit, helping the business to grow and succeed.