Definition of Fixed Asset
A Fixed Asset is a tangible, long-term resource owned by a business that is used in its operations to generate revenue. These assets are not intended for immediate sale but are expected to provide benefits over several years. Examples include land, buildings, machinery, vehicles, and equipment.
Meaning of Fixed Asset in Detail
In business and accounting, fixed assets play a vital role in daily operations. Unlike current assets such as inventory or cash, fixed assets are used repeatedly over the long term. They are capitalized in the balance sheet and depreciated (except land) to spread their cost over their useful life.
Fixed assets are also known as property, plant, and equipment (PP&E) in financial statements. Their acquisition reflects a company’s investment in long-term growth.
Classification of Fixed Assets
Fixed assets can be categorized into:
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Tangible Fixed Assets – Physical in nature, such as machinery, vehicles, furniture, land, and buildings.
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Intangible Fixed Assets – Though not physical, they provide long-term value. Examples include patents, copyrights, trademarks, and goodwill.
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Natural Resources – Assets like oil reserves, forests, and mines are also considered fixed assets.
Formula for Fixed Assets
Fixed assets appear in the balance sheet as:
Net Fixed Assets = Gross Fixed Assets – Accumulated Depreciation – Impairments
Where:
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Gross Fixed Assets = Original purchase price of the asset.
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Accumulated Depreciation = Total depreciation charged over the years.
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Impairments = Reduction in asset value due to damage or obsolescence.
Example Calculation
Suppose a company purchases machinery worth ₹10,00,000 with an estimated useful life of 10 years and no residual value.
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Annual Depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000
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After 3 years, Accumulated Depreciation = ₹3,00,000
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Net Fixed Asset Value = ₹10,00,000 – ₹3,00,000 = ₹7,00,000
Journal Entry for Fixed Asset (Accounting)
When a company purchases machinery for ₹5,00,000 in cash:
When depreciation of ₹50,000 is charged at year-end:
Detailed Illustration Calculation
Case: XYZ Ltd purchased equipment worth ₹12,00,000 on April 1, 2022. Useful life is 5 years with a residual value of ₹2,00,000.
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Depreciable Amount = ₹12,00,000 – ₹2,00,000 = ₹10,00,000
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Annual Depreciation (Straight Line Method) = ₹10,00,000 ÷ 5 = ₹2,00,000
Depreciation Schedule
| Year | Opening Balance | Depreciation | Closing Balance |
|---|---|---|---|
| 2022 | ₹12,00,000 | ₹2,00,000 | ₹10,00,000 |
| 2023 | ₹10,00,000 | ₹2,00,000 | ₹8,00,000 |
| 2024 | ₹8,00,000 | ₹2,00,000 | ₹6,00,000 |
| 2025 | ₹6,00,000 | ₹2,00,000 | ₹4,00,000 |
| 2026 | ₹4,00,000 | ₹2,00,000 | ₹2,00,000 |
Key Features of Fixed Assets
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Long-term usage (more than one year)
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Not intended for resale
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Depreciable (except land)
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Provides future economic benefits
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Recorded in balance sheet
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Subject to impairment
Importance of Fixed Assets in Business
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Supports production and operations
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Helps in expansion and growth
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Increases company valuation
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Provides collateral for loans
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Enhances efficiency and profitability
Advantages and Disadvantages of Fixed Assets
Advantages:
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Long-term benefit to business operations
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Adds to organizational stability
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Used as security for borrowing
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Generates continuous income
Disadvantages:
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High initial cost
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Depreciation reduces value over time
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Obsolescence risk due to technology changes
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Less liquidity compared to current assets
Usage of Fixed Assets
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Manufacturing units use machinery
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Retail stores use buildings and furniture
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Transport businesses rely on vehicles
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IT firms depend on servers and office equipment
Case Studies of Fixed Assets
Case 1: Reliance Industries
Reliance invested heavily in fixed assets like oil refineries, petrochemical plants, and telecom towers, which became the backbone of its long-term growth.
Case 2: Tesla
Tesla’s gigafactories are massive fixed assets that enable large-scale electric vehicle production, ensuring future dominance in the EV market.
Practical Example
A bakery buys an oven worth ₹1,50,000. The oven is used for daily production for 10 years. This fixed asset allows the bakery to produce thousands of items daily, contributing directly to revenue.
Common Mistakes or Misunderstandings
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Confusing fixed assets with current assets
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Ignoring depreciation and impairment in accounts
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Overstating asset values without proper revaluation
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Treating repairs as capital expenditure instead of revenue expenditure
Real-Life Applications of Fixed Assets
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Legal Implications: Fixed assets are subject to capital gains tax when sold.
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Compliance: Companies must maintain asset registers under the Companies Act, 2013.
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Auditing: Auditors verify fixed asset ownership and depreciation calculations.
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Financing: Banks assess fixed assets before granting loans.
FAQs
Q1. Is land a fixed asset?
Yes, land is a fixed asset but it is not depreciated.
Q2. What is the difference between fixed assets and current assets?
Fixed assets are used long-term, while current assets are liquid and consumed within one year.
Q3. How are fixed assets valued in accounting?
They are recorded at historical cost and reduced by accumulated depreciation.
Q4. Can goodwill be treated as a fixed asset?
Yes, goodwill is an intangible fixed asset.
Q5. Do fixed assets affect company valuation?
Yes, higher fixed assets increase the company’s asset base and financial stability.
Expert Tip from Learn with Manika
“When analyzing a company, don’t just look at its profits. Check its fixed asset base too—it reveals the firm’s long-term stability and growth potential.”
Related Terms
- Current Assets
- Depreciation
- Property, Plant & Equipment (PP&E)
- Capital Expenditure
- Intangible Assets
- Working Capital