Fixed asset is a term used in accounting for assets and property that cannot be easily converted into cash. For example, land, buildings, plant, machinery, furniture, life stock, vehicles and other equipment. Fixed assets are of permanent nature, which are not intended to be disposed. Thus fixed assets are held by a company in order to earn revenue and not to be sold in an ordinary course of business.
Making an investment in fixed assets is the first step towards setting up a corporation. This investment which is made in the non-current (fixed) assets is called fixed capital. Non-current assets are items in which the capital is locked up for a long period.
Fixed assets are also known as tangible assets (assets that are perceptible of touch). In most cases, only tangible assets are referred to as fixed.
IAS 16 (International Accounting Standard) defines fixed assets as assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliable.
Depreciation is the expense generated by the uses of an asset. In simple words, it is the expense caused by wear and tear of the assets.
Assets can be used to generate revenue for more than a year. That means it is long term.
It is therefore obligatory to charge depreciation on the total value of the asset that has contributed to the revenue for the given period. The depreciation is charged in order to accurately determine the net profit made over the given period.
Net book value
Net book value of an asset is the difference between the historical cost of the asset and the depreciation associated with it. It is written in the Standard Accounting Statement (SAS) and IAS 16 that the value of asset should be carried at the net book value.
Carrying out the value of the asset as per the net book value is also the best way of consciously presenting it to the owners of the business and potential investor.
According to Shubin, fixed capital is defined as the fund required for the acquisition of those assets that are to be used for a long period of time.
Importance of fixed capital
The acquisition of fixed assets is the primary requirement for starting a company. Fixed capital is required for acquiring fixed assets. There are certain enterprises which cannot think of running in the absence of fixed capital. For example, manufacturing and public utilities.
Factors affecting fixed capital
The amount of fixed capital required varies from business to business because of the following factors,
Nature of industry business
Kind of products manufactured
Size of business unit
Methods of handling production
Mode of acquiring fixed assets
Diversity of manufacturing lines