What is a Fixed Asset?
A fixed asset is an item which a business purchases and uses to generate its income.
Unlike an asset like stock which you may buy to sell onto customers, a fixed asset is an overhead which you buy to run your business. A fixed asset however is not classified as an overhead because it will last for more than one year.
Examples of Fixed Assets
- Computers & Laptops;
- Office furniture;
- Equipment and machinery which the business purchases to generate its income;
- Office improvements.
A business takes on a new employee which means they need to buy a new laptop. The laptop will last more than one year so is classified as a fixed asset.
A photographer is setting up a new business and needs to buy new camera and lighting equipment which are required to generate income, therefore the new equipment will be classified as fixed assets
A distribution business has purchased from a supplier 10,000 units of stock and storage for the new stock to be installed in its warehouse. The 10,000 units of stock are not a fixed asset since they will be sold onto customer however the new storage and will be a fixed asset because the business will use this for years to come.
Fixed Assets and Financial Statements
Fixed assets are shown on your balance sheet often as a single line along with a corresponding fixed asset note in the accounts to add more detail. Here is an example of each:
What can be included in the cost of a fixed asset?
The costs that can be included in the cost of a fixed asset includes all the amounts paid to get the asset installed and usable such as:
- purchase price;
- Delivery costs;
In Scenario 3 above if the business paid installation costs for the storage units then the cost of the fixed asset would be the amount paid for the storage plus those installation costs.