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Fixed Assets

The assets of a business are the resources supplied by the owner and/or people other than the owner. Assets consist of property of all kinds, such as:

Land and buildings
Plant and Machinery
Fixtures and fittings
Tools
Motor vehicles
Furniture
Office equipment
Stock of goods
Cash at bank
Cash in hand

Debts owed by customers and even payments made in advance are all assets.

Assets are referred to as fixed assets when they are purchased for use in the production process of a firm and not for resale. If they are for resale, they are no longer fixed assets.

For something to qualify as fixed assets the business:
must own it;
have control over them so that benefits can be derived from them;
can assess its value with accuracy.

Property, plant, and equipment are often used to refer to fixed assets which the business uses in its normal operations to generate income from their use.

Fixed assets are classified into tangible assets and intangible assets. Tangible assets are physical assets that can be touched such as cash, inventory (stock), plant and machinery, building and land. They are acquired for use in the business and not for resale. Fixed assets are mostly tangible assets and this means they are maintained for at least a few years in the firm and, except land, are subjected to depreciation. Tangible assets can be further classified into current assets and fixed assets. Unlike current assets, fixed assets cannot easily be converted into cash.

Intangible assets are non-physical assets examples of which are copyrights, computer programs, goodwill, patents and trademarks.

Assets form an important part of the accounting equation. Assets = owner’s equity + liabilities. The total assets minus the total liabilities are called the net assets which are termed owner’s equity.

All assets have cost, book value, market value or residual value The value of an asset must include capital expenditure related to it and that includes costs necessary to get the asset operational at its desired location. Expenditure that increases the value of fixed assets includes:


  • Delivery and installation costs;
  • Improving or adding items to an asset such as adding safety devices to a vehicle or painting the exterior wall of the new factory;
  • Costs incurred in testing the fixed asset before use;
  • Legal and professional costs paid for purchasing land or buildings, and for their planning and construction;
  • Taxes and duties.

The value of fixed assets is always reported at its net book value. The net book value of an asset is its historical cost less its accumulated depreciation. However, on the balance sheet, fixed assets and their respective accumulated depreciations are shown separately with accumulated depreciation as deduction of the asset at cost.

Fixed assets are listed according to the length of time they are expected to continue earning profit for the company. The one that is expected to be kept the longest is at the top of the list, right down to the one at the bottom that is expected to have the shortest length of time for which it is kept for production. Example of the list:

Land and buildings
Fixtures and fittings
Machinery
Motor vehicles

All asset accounts have debit balances. However, there is a group of asset accounts that have credit balances. These credit balance accounts are known as contra asset accounts and they are contra to the asset accounts which have debit balances. They provide for a part of the cost of the asset that contributes to generating revenues to be written off to expense in each accounting period. This is a prudent measure considering that the asset steadily loses its effectiveness year by year. Examples of contra asset accounts are:

Provision for bad debts account
Provision for depreciation account
Provision for discounts account

Last Updated (Saturday, 06 November 2010 15:11)