Fixed assets are assets that a company owns for use in its business and to produce goods. Typically it could be machinery. They are not for resale and comprises of land, buildings i.e. offices, warehouses and factories, vehicles, machinery, furniture, equipment and the like. Every company has some fixed assets though the nature or kind of fixed assets vary from company to company. A manufacturing company’s major fixed assets would be its factory and machinery, whereas that of a shipping company would be its ships.
Fixed assets are shown in the Balance Sheet at cost less the accumulated depreciation. Depreciation is based on the very sound concept that an asset has a useful life and that after years of toil it wears down. Consequently, it attempts to measure that wear and tear and to reduce the value of the asset accordingly so that at the end of its useful life, the asset will have no value.
As depreciation is a charge on profits, at the end of its useful life, the company would have set aside from profits an amount equal to the original cost of the asset and this could be utilized to purchase another asset. However, in the inflationary times, this is inadequate and some companies create an additional reserve to ensure that there are sufficient funds to replace the worn out asset. The common methods of depreciation are:
Land is the only fixed asset that is never depreciated as it normally appreciates in value. Capital work in progress - factories being constructed, etc. - are not depreciated until it is a fully functional asset.
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Fixed assets are shown in the Balance Sheet at cost less the accumulated depreciation. Depreciation is based on the very sound concept that an asset has a useful life and that after years of toil it wears down. Consequently, it attempts to measure that wear and tear and to reduce the value of the asset accordingly so that at the end of its useful life, the asset will have no value.
As depreciation is a charge on profits, at the end of its useful life, the company would have set aside from profits an amount equal to the original cost of the asset and this could be utilized to purchase another asset. However, in the inflationary times, this is inadequate and some companies create an additional reserve to ensure that there are sufficient funds to replace the worn out asset. The common methods of depreciation are:
- Straight line method - The cost of the asset is written off equally over its life. Consequently, at the end of its useful life, the cost will equal the accumulated depreciation.
- Reducing balance method - Under this method, depreciation is calculated on the written down value, i.e. cost less depreciation. Consequently, depreciation is higher in the beginning and lower as the years progress. An asset is never fully written off as the depreciation is always calculated on a reducing balance.
Land is the only fixed asset that is never depreciated as it normally appreciates in value. Capital work in progress - factories being constructed, etc. - are not depreciated until it is a fully functional asset.
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