What is a Fixed Asset?

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What is a fixed asset?

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;
  • Buildings;
  • Vehicles;
  • Office improvements.

Scenario 1

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.

Scenario 2 

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

Scenario 3

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:

Example balance sheet
Example Balance Sheet
example fixed asset note
Example Fixed Asset Note 

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;
  • Installations;
  • Guarantees.

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.

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