Long-Term Assets

Nature of Fixed Assets

Fixed assets are tangible, long-lived assets used in the normal course of business. Fixed asset costs include all costs necessary to get the asset ready for its intended purpose or use.

The daily costs of doing business are normally simple for the organization to classify, as they are usually classified as expenses. Sales to customers along with daily expenses all flow through to the income statement and will ultimately determine whether the business had a profit or loss that period. However, there are times when an expenditure is not an expense, but rather a capital investment in a fixed asset that will be reported as an asset on the balance sheet, not an expense on the income statement. Fixed assets are reported at book value on the balance sheet, which is the fixed asset's original cost less accumulated depreciation.

To properly distinguish an expenditure as an expense or as a capital investment in a fixed asset, key questions must be considered. The first question to consider is whether the item purchased is long-lived. If the answer is no, then the item should be classified and recorded as an expense on the income statement. However, the useful lives of fixed assets may extend beyond one accounting cycle or one year. If this is true of the asset, the answer is yes, and then the next question to consider is whether the asset is material, that is having substantial value for the business. If the item will be used a long time but is small and inexpensive, the item should be recorded as an expense on the income statement. If the item will be used for longer than a year and has a material value and related cost, it should be recorded as either a fixed asset or an investment on the balance sheet.

A fixed asset is a tangible non-current asset used in the normal course of business. To determine what will be recorded, a final question is considered as to whether the asset will be used in the normal business operations. If the asset will not be used in normal business operations, then the asset is classified and recorded as an investment or non-operating asset on the balance sheet. Conversely, if the asset will be used in normal business operations, the asset is classified and recorded as a fixed asset on the balance sheet. The distinction between the two categories of assets is made to help balance sheet users see how much of the value in long-term assets directly supports daily operations.

Frequently referred to as plant, property, and equipment (PPE) or plant assets, fixed assets should be recorded at cost. The costs of a fixed asset should include all items required to get the asset ready for its intended purpose or use. Some examples of fixed assets are buildings, machinery, equipment, and land. Fixed assets are commonly reported on the balance sheet under Plant, Property, and Equipment.

The costs related to buildings, which are PPE fixed assets, may include purchase price, brokerage fees, taxes, title fees, and attorney fees. Other PPE costs may be purchase price, taxes, transportation charges, insurance, installation, and assembly charges for machinery and equipment. Some common costs related to land as a fixed asset are purchase price, title insurance, real estate commissions, legal fees, surveying, clearing, and grading. Land is the only fixed asset that is not depreciated, as it has an indefinite life.

Costs of Acquiring Fixed Assets

Fixed-asset costs include all the costs associated with acquiring or preparing an asset for its intended use. Examples of assets include building, machinery and equipment, and land.