What are Fixed Assets?
Fixed assets can be defined as those assets that are purchased by an organization other than biological asset (which includes living animal or plant) and are held for use in production or supply of services or goods and it could be for administrative or rental to others purpose and the firm wishes to use those assets for more than one accounting period or say more than a period of 12 months. Fixed assets are divided into tangible assets (can touch physically) and intangible assets (cannot touch).
Examples of Fixed Assets
Below are the most common examples of Fixed Assets.
- Land (Tangible asset)
- Building (Tangible asset)
- Factories (Tangible asset)
- Machinery (Tangible asset)
- Vehicles (Tangible asset)
- Inventory (Tangible asset)
- Computer Hardware (Tangible asset)
- Softwares (Tangible asset)
- Office Supplies (Tangible asset)
- Office Equipment like Printers, Chairs etc (Tangible asset)
- Natural Resources (Tangible asset)
- Patent (Intangible Asset)
- Copyrights (Intangible Asset),
- Franchisee (Intangible Asset)
- Licenses (Intangible Asset)
Now that we have seen some examples of fixed assets, let us
Fixed Asset Accounting
The following are the top 4 examples of the fixed asset accounting
Fixed Asset Accounting Example #1
Downey is thinking to start business nearby coastal of Gujarat. He starts a firm with the name of 3M and registers it with the relevant authorities. He purchases below asset to start the firm by using the loan proceeds, you are required to account the fixed assets in the books of account and discuss why they fall in the category of the fixed asset.
Fixed assets are those assets that are purchased and held by the firm for more than one accounting period or for more than 12 months period. Let’s test whether the above equipment passes the test for fixed assets?
Hence, the total cost to be accounted for will be 58,050,000 in books of account.
Fixed Asset Accounting Example #2
Fun and foods a leading company who sells hamburger is now considering an expansion plan. It has considered Italy as the next country where it would like to establish its footprints. It also plans to set up an administrative team where they would require a computer, laptop, computer accessories, Cisco phones for those employees working for corporate. You are required to discuss whether these Cisco phones, computer accessories, computer, and laptop will fall within the definition of fixed assets?
The definition of fixed assets states that any asset that is purchased by the firm for more than one accounting period or for administrative purposes or for rental to others. In this case we are not given any period information but however it is mentioned that this equipment will be used for administrative team and hence the purposed will be for administrative purpose and it appears that this equipment will be used for more than one accounting period since its planning to expand business in Italy and further a new corporate office is also opened. From the above discussion, equipment will fall within the purview of fixed asset definition.
However, the computer accessories need to be scrutinized in detail whether same are separable or inseparable assets as the accounting for the same is done differently. If they are inseparable, then they will be included in the cost to the computer or if they are separable then they will be recorded as a different asset in books of account.
Fixed Asset Accounting Example #3
Asha builders are on the verge of completing the construction of buildings at the remote site which they started 5 years ago. However, those buildings are not ready to use but 80% of the flats have been sold out. Asha the owner of Asha builder is unsure as to how she should account for buildings in her books of account as this was her new business. She has approached an accountant to help her decide the way these buildings cost and sell should be recorded in books of accounts.
Asha is into the field of a construction business, where the normal course of business is to sell the buildings at a price more than what it took to make and purchase the raw materials. Further, it took more than 5 years for them to complete the project. So, if we consider a definition of fixed assets it states that an asset which is intended to use for more than one accounting period or more than 12 months or for administrative purpose. Here, the first criteria are met where the assets were in possession for more than 5 years. So, whether this should be included as fixed assets in books of account?
Well, the answer to the above question is No. The reason is buildings on normal occasion take more time to complete and it is a business of Asha builders to sell them and they don’t intend to use. So, this criteria of using those constructed buildings fail to meet and hence cannot be accounted as fixed assets in the books of accounts. Instead, the selling pricing less cost price and all the cost will be treated as normal income in the revenue statement and the balance will be profit. However, one needs to follow what accounting standard on revenue states as to how to account revenue, cost and profit, for example, there is a cost of completion method that one can use.
Fixed Asset Accounting Example #4
General motor transport services into the business of transporting goods from one place to another. They owned 12 trucks, 6 small tempos and 5 rented (on operating lease for 5 years) trucks. Discuss how these assets will be recorded in the books of account of general motor transport services whether as fixed assets or will be recorded in revenue statement?
The criteria for recording assets as fixed assets that are purchased and:
- Intention to use for more than one accounting period or 12 months
- Use for administrative purpose.
Here, these vehicles are used by them and since it’s their business and hence they would be using for more than one accounting period else they won’t be able to do business since replacing them every year will be too costly for them. Now the second thing here is the rest 5 trucks are rented (operating lease) and are not purchased by them and hence those will not be recorded as fixed assets. However, 12 trucks and 6 small tempos will be recorded as fixed assets.
Fixed assets are those assets that business users in normal course to either manufacture goods or for administrative purpose. The firms make a large investment in those assets and are intended to be used for more than 12 months as firms cannot afford to replace them every year as it would appear to be a costly decision for them. One needs to see the intention and whether a firm is going to use, or it is selling them in order to consider it to be recorded as fixed assets.
This has been a guide to what are Fixed Asset and its definition. Here we discuss fixed asset accounting along with practical examples and detailed explanation. You can learn more about accounting from the following articles –