A fixed asset is a long term asset possessed by a company and helps in generating revenue for the company. It is not expected to be converted into cash or disposed-off within the next financial year. For a manufacturing company, examples of fixed asset are Buildings, Land, Plant and Machinery, Vehicles, Investments (held for more than year).
Since fixed assets have are subject to regular wear and tear, they are depreciated over their useful life. Fixed Assets are recorded on the Asset side of the Balance Sheet and are depreciated or amortized through the income statement (Profit and Loss account) until they are disposed-off or scrapped. They are categorised as Tangible and Intangible Assets:
- Tangible assets are the assets that are visual in nature and are purchased or manufactured by the company. Factory shed is an example of tangible asset for an auto component maker.
- Intangible assets are non-visual assets and are usually built by the company by creating a brand value or a patent or trademark. It can even be bought or acquired from another company and are amortized over its estimated useful life.
Fixed assets and depreciation is used by analysts to determine the profitability and sustainability of a company. Depreciation is useful for the companies as it acts as a non-cash expense and helps to reduce the tax liability burden of the companies. Fixed Assets help analysts to determine certain important ratios like Asset Turnover Ratio which helps assess and compare the performance of the company within its industry.