What Are Fixed Assets? Types, Depreciation and Examples

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Fixed assets are long-term tangible items a company owns and uses to run its business: land, buildings, machinery, equipment, furniture and vehicles. They are held for production, for office and operating use, or for rental to third parties, not for resale. A company expects to use them beyond the current accounting period. On the balance sheet they usually appear as property, plant, and equipment (PP&E), and some companies call them capital assets.

How Fixed Assets Work on the Balance Sheet

A balance sheet splits assets into current and noncurrent. Current assets, such as cash, accounts receivable, inventory and prepaid expenses, are expected to be converted to cash or used up within a year. Noncurrent assets are not.

Fixed assets are one part of the noncurrent group. The rest includes long-term investments, deferred charges and intangible assets. The dividing line is physical form: fixed assets are tangible, and intangibles such as goodwill, patents, copyrights and trademarks are not.

When a company buys a fixed asset, it capitalizes the cost. The purchase goes on the balance sheet as an asset rather than straight to the income statement as an expense. The cost is then spread over the years the asset helps earn revenue. Spending that is used up quickly is expensed immediately, even when it relates to a fixed asset. Rock salt bought to de-ice the company parking lot is an expense. The parking lot itself is a fixed asset.

Depreciation and Net Fixed Assets

Fixed assets lose value through wear, age and obsolescence. Depreciation allocates part of the cost to expense each period. Tangible assets are depreciated and intangible assets are amortized. Land is the exception: it is a fixed asset that is not depreciated.

The simplest method is straight-line depreciation:

Annual depreciation = (Cost − Salvage value) ÷ Useful life

Hypothetical example: A bakery buys an oven for $50,000. It expects to use the oven for five years and to sell it for $5,000 at the end.

• Annual depreciation: ($50,000 − $5,000) ÷ 5 = $9,000
• Accumulated depreciation after two years: $18,000
• Book value after two years: $50,000 − $18,000 = $32,000

Across the whole balance sheet, the same logic produces net fixed assets:

Net fixed assets = Gross PP&E − Accumulated depreciation − Impairments

Book value is an accounting figure, not a price. Because depreciation is a non-cash expense, it is added back in measures such as EBITDA.

Acquiring, Impairing and Disposing of Fixed Assets

Purchases and sales of fixed assets are reported under cash flow from investing activities. A purchase is a cash outflow and a sale is a cash inflow. Purchases are often labeled capital expenditures, the figure subtracted from operating cash flow to arrive at free cash flow.

If an asset’s recoverable value falls below its net book value, for example because a machine becomes outdated, the company records an impairment write-down. US GAAP and IFRS apply different impairment tests to long-lived assets, so the timing and size of write-downs can differ between the two frameworks.

At the end of its useful life, an asset may be sold for salvage value or scrapped for nothing if it is obsolete. Either way, its cost and accumulated depreciation are removed from the books, and any difference between sale proceeds and book value is a gain or loss. Hypothetical example: if the bakery sells the oven after two years for $28,000, it receives a $28,000 investing inflow and records a $4,000 loss against the $32,000 book value.

Examples of Fixed Assets

Common fixed assets include:

• Land and buildings: a head office, a main factory and its smaller outbuildings, warehouses, a parking lot. Each building is usually recorded separately from the land under it, because only the building is depreciated.
• Machinery and equipment: production lines, ovens, forklifts, copiers and printers, servers.
• Vehicles: delivery trucks and company cars used in operations.
• Furniture and fixtures: desks, office chairs, shelving, whiteboards.
• Computer hardware: laptops and networking gear (software is generally intangible).

Classification follows use, not the object. A produce company’s delivery van is a fixed asset. An employee’s personal car used to commute is not on the company’s books. Model toys are inventory for a toy shop that sells them, and a fixed asset only if the business holds them for long-term operating use, such as display pieces. Cash is never a fixed asset, because it is a current asset by definition.

Why Fixed Assets Matter to Investors

Lenders and investors use fixed asset figures to judge financial health, value a company and decide whether to lend or buy shares. They matter most in capital-intensive industries such as manufacturing, utilities and transportation. Heavy fixed asset spending that produces negative investing cash flows can signal growth or expansion, but future profits must then cover the depreciation it creates.

Limitations

• Historical cost: PP&E is carried at purchase price less depreciation, so a decades-old building may be recorded far below its market value.
• Estimates drive the numbers: useful life, salvage value and depreciation method are management judgments that change reported profit and book value.
• Illiquidity: fixed assets cannot be quickly sold at book value to meet short-term obligations.
• Comparability: companies with identical equipment can report different net fixed assets under different methods or accounting standards.

FAQs

The Bottom Line

Fixed asset figures help lenders and investors judge financial health, especially in capital-intensive industries such as manufacturing, utilities and transportation. Book value reflects historical cost and management estimates, so it can sit far from market value and vary between companies with identical equipment. Reading net fixed assets alongside depreciation methods, impairments and investing cash flows gives a clearer picture of what a company's long-term assets are really worth.