What are Fixed Assets?

Picture showing various fixed assets as an example

Meaning/ Definition:

Fixed assets are assets of a business that are intended to be held, for a long time. Fixed assets are employed for producing goods, rendering services and generally carrying out operations of the organization. 

Fixed assets along with those under development (Capital Work-In-Progress) constitute an important component of tangible assets

The minimum time period of holding is more than one year. If the period for which an asset is held is one year or below, it fall under the category of current asset.

Examples:

1. Land
2. Buildings and civil works
3. Plant and machinery
4. Furniture and fixtures
5. Electrical equipment and installations
6. Computers and electronic office equipment
7. Vehicles, aircraft and ships

Exceptions:

If the same fixed assets are held as stock-in-trade, that is for sale in the ordinary course of business then for that business those assets are not fixed assets but constitute just inventory.

For example if a business is engaged in the business of purchasing, stocking and selling machines then for that business the machines merely constitute stock-in-trade.

What is Depreciation?

Definition. Meaning:

The common English meaning of the word is devaluation or reduction in the value of an asset. This fall in value may be for many reasons including normal wear and tear, fall in market price and so on. However in accounting/ financial parlance the word depreciation is used in the sense of normal wear and tear of fixed assets on account of use and time.

Depreciation is treated as an expense every year while computing the profits and drawing up the ‘Profit & Loss Account’ of a business.

Picture showing depreciation of factory assets due to normal wear and tear

Methods of Calculation:

Depreciation is calculated usually under two methods:

1. Straight-line: The residual value of the asset is written off equally over the useful life of the asset. Results in uniform charge throughout.
2. Written Down Value: At the end of every year the depreciation charged during the year is reduced from the value of the asset (written down value). In the next year the depreciation rate is applied on the written down value. Results in higher depreciation in the initial years and lower charge in latter periods.

Conclusion:

Depreciation is an expense arising out of normal wear and tear of fixed assets due to use and passage of time. It is charged off as an expense every year in the profit and loss statement.