Fixed Asset

Key Takeaways
* Fixed assets (also called capital assets) are long-term tangible resources a company uses to operate or generate income, typically listed as property, plant, and equipment (PP&E) on the balance sheet.
* They are noncurrent and not easily converted to cash within a year; their cost is allocated over time through depreciation (except land).
* Acquisition and disposal of fixed assets appear in cash flows from investing activities and can affect cash flow, profitability, and balance-sheet metrics.
* Impairment, salvage value, and depreciation methods can cause book value to diverge from market value—important considerations for investors, especially in capital-intensive industries.

What is a fixed asset?

A fixed asset is a tangible, long-lived resource owned by a company and used in operations to produce goods or services, rent to others, or support business activities. Examples include buildings, machinery, vehicles, and office equipment. Fixed assets are recorded on the balance sheet under property, plant, and equipment (PP&E).

Fixed assets vs. current assets

• Current assets are short-term and typically convertible to cash within a year (cash, accounts receivable, inventory, prepaid expenses).
• Fixed assets are noncurrent, not intended for sale in the normal operating cycle, and provide economic benefit over multiple years.

Accounting and depreciation

• Fixed assets are capitalized at cost (purchase price plus necessary costs to prepare the asset for use) and then expensed over their useful lives through depreciation.
• Depreciation spreads the asset’s cost across reporting periods to match expense with revenue generation. Common methods include straight-line and accelerated approaches.
• Land is a fixed asset but is not depreciable.
• Intangible long-lived assets are amortized rather than depreciated.

Impairment and book value

• If an asset’s recoverable amount falls below its carrying (book) value, an impairment write-down reduces the recorded value to reflect diminished economic benefit.
• Book value (cost less accumulated depreciation) can differ from current market value due to depreciation method, obsolescence, or changing market conditions.

Acquisition and disposal

• Purchases and sales of fixed assets are reported in the cash flow statement under investing activities:
• Acquisition = cash outflow
• Disposal = cash inflow (less any loss on disposal)
• At the end of its useful life, an asset may be sold for salvage value or written off if obsolete or worthless.

Examples

• A bakery’s ovens, a delivery company’s trucks, and a factory’s production line are fixed assets.
• A company parking lot is a fixed asset; rock salt purchased to maintain it is an expense.
• A personal vehicle is not a company fixed asset unless owned and used by the business for operations.

Why investors and creditors care

• Fixed assets reflect capital intensity and future productive capacity—critical for valuing companies in manufacturing, utilities, transportation, and similar sectors.
• Large capital expenditures may indicate growth or reinvestment but can also strain cash flow.
• Depreciation, impairment, and asset valuations impact profitability ratios, return on assets, and debt covenant calculations.

Other noncurrent assets

Noncurrent assets include long-term investments, deferred charges, and intangible assets such as goodwill, patents, trademarks, and copyrights. These differ from fixed assets mainly by lacking physical substance.

Common question

Is a car a fixed asset?
* It depends on use. If the company owns and uses the car to generate revenue (e.g., delivery vehicle), it is a fixed asset. If it’s for personal use, it is not recorded on the company’s books.

Bottom line

Fixed assets are tangible, long-term resources central to a company’s operations and capital structure. Proper capitalization, depreciation, impairment assessment, and disclosure are essential for accurate financial reporting and for stakeholders assessing a company’s operational capacity and financial health.