Why are Fixed Assets Important for a Business?

It's a long time since you are running your business, you are well aware of the end of the financial year, but you are still clueless about how much does your business actually worth.

Do you have fixed assets in your organization or company? Of course, you have them.

How much importance do you give to your fixed assets?

The solution to your business worth is involved with your fixed assets.

For almost all the business owners only revenue is assessing their business worth. Anybody rarely considers one of the fundamentals while their calculations i.e. Fixed Assets.

Some of the examples of fixed assets are land, buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant & machinery.

You should know the real asset value of your business; your financial accounting is incomplete without the definite value of fixed assets in the company as it will not give the real picture of your business.

What are the fixed assets?

Fixed assets are also known as tangible assets or property, plant, and equipment (PP&E). In terms of accounting, fixed assets are the assets and property that can be easily converted into cash.

Fixed assets can be defined as a long-term tangible part of a property or equipment that an organization owns and uses its operation to generate income.

It is anticipated that the fixed assets cannot be consumed or converted into income within a year.

These fixed assets basically appear on the balance sheet as property, plant, and equipment (PP&E).

Also Read: The Definitive Guide to Fixed Asset Tracking & Management

What is the difference between Assets and Fixed Assets?

Assets and fixed assets cannot be defined differently as they are similar in many ways but can be differentiated on how they are used and how they result in transactions.

Assets are the belongings and resources of any organization which is responsible for kind of transactions. Some of the examples of assets are cash, accounts receivable, inventory, land, buildings, equipment, trademarks, etc.

Whereas, fixed assets are the long-term and tangible assets that are used in business like property, plant, or equipment. Some of the examples of fixed assets are land, buildings, manufacturing equipment, office equipment, furniture, fixtures, vehicles, etc. Moreover, the fixed assets can be depreciated over their useful lives.

What are the types of fixed assets?

There are two types of fixed assets:

1. Tangible Assets:

Tangible assets are assets that have a physical existence. These incorporate buildings, land, hardware, equipment, vehicle, furniture, etc.

2. Intangible Assets:

Intangible assets are those assets which don't count any physical existence. This incorporates goodwill, licenses, registered or trademarks, intellectual property, etc.

How fixed assets work?

Any organization would make its balance sheet statement which consists of its asset's liabilities, and shareholder's equity. Here assets are differentiated into two types based on their useful lives. Current Assets and Non-current Assets.

A fixed asset basically has a physical form and reported in a balance sheet in the form of property, plant, and equipment (PP&E).

Any fixed asset is purchased or bought for production of goods, the supply of goods, and its related services; along with its rental agreement to the third party or for use in the organization itself.

These assets are called  “fixed” for a reason that any of these assets will not be used or sold within the accounting year. When an organization disposed or purchase any fixed asset it is recorded in the cash flow statement.

Any purchase or sale of fixed assets represents a cash flow of an organization in terms of cash outflow and cash inflow respectively.

In case the asset is subjected to any impairment write-down its value will fall below its net book value. This reflects on the balance sheet as its recorded value would be adjusted downward (to reflect that overvalue in comparison to its market value).

Whenever the fixed asset reaches the end of its useful life, it gets disposed of by its selling for a salvage amount (this is an estimated value of any fixed asset in case it is broken or sold in parts).

In a few cases, the fixed asset after its useful life becomes outdated and it might not make any money in the market further, therefore, it is then disposed of without any received payment in return.

Eventually, any fixed asset will be marked on the balance sheet either it is useful or disposed of from the organization.

Also Read: What Are the Various Stages of the Fixed Asset Life Cycle?

What are the current assets?

Current assets are assets that are mostly liquid assets and will be converted into cash within a year.

Current Assets Vs Fixed Assets:

While both the current and fixed assets are accounted for in a balance sheet but still there is a difference in utilization. Where current assets are used or converted into cash in a short-term (within a year); fixed assets are utilized for a longer period of time (more than one year).

What are non-current assets?

Non-current assets are the assets and properties that are owned by the organization that does not get converted into cash that easily.

Non-current Assets Vs Fixed Assets

Fixed assets are the type of noncurrent assets. There are categories of noncurrent assets, they are - fixed assets, intangible assets, long-term investments, and deferred assets.

Importance and benefits of fixed assets

• Information about an organization's assets will help you acquire accurate financial reporting, business valuations, and thorough financial analysis.
• An organization uses these reports and balance sheets to record, depreciate, dispose of assets and the analysts use them to study on corporation's financial; statements.
• A clarified representation of organizational capital sum to the followed financial profit and evaluation of business concerns.
• Information on fixed assets and their depreciation is additionally used by financial experts to report down whether the organization id profitable or non-profitable enterprise.
• Ascertainment of profitability of the fixed asset, the plan of action for depreciation has to be inspected.

Also Read: Useful Points to Remember to Embrace Asset Tracking

Conclusion

Fixed assets are the foundation of any organization as they get accounted for their purchase as well as its depreciation.

If you are not aware of your fixed assets, then you will get to know about them at the end of the financial year, maybe it is too late then.

To get a regular update and information about your fixed assets before, during, and after the financial year, you should get asset management software. This will help you in tracking your fixed assets and also get the exact worth value of each of your fixed assets.