A fixed asset is any asset (something that has physical form) a company has that is not intended for resale. Fixed assets are the physical items that are used in the course of business – machinery, buildings, equipment, vehicles, land, etc. Fixed does not refer to being stationary or immovable; it indicates that an item is to last and be in use for over a year. This allows the economic benefits from the asset to be realized over a long term. Fixed assets lose value over time as they age, which is reflected on a tax return as depreciation.
Classification of fixed assets is listed as: investments, intangible or tangible.
Tangible assets are the physical items. Intangible assets are equally as important, however. Intangible assets include trademarks, company goodwill and patents. Over the course of several years, the value of the asset will decrease. Age, usage and obsolescence will all diminish the value of the asset, and must be addressed within the financials of the company. This can be handled through a depreciation schedule. The depreciation will address the useful life of the item, the residual, or remaining life of the item and the cost of the item. After taking into account the depreciation amount for the year, it is listed as an expense on the company’s tax return.
Another important aspect of fixed assets is the difference between the economic life of an asset and the physical life of the asset. Based on the amount of deterioration over the years, an item may reach a point where it is not economically feasible to continue using it. Even though the item may have remaining physical life left – the ability to function – it may not be worthwhile from an economic standpoint. Disposing of the asset, through a sale, for example, is calculated on the tax return as residual value.