What is a Fixed Asset? Importance, Examples and Types (2024) – Shopify

When managing the financial side of an online business, there’s a lot to learn. Your company’s balance sheet is a complex list of financial lingo. Luckily, a “fixed asset” is a highly important term that’s easy to grasp.

Fixed assets are essential to virtually every kind of business—if you’re running a small to midsize business, you probably have at least one. They play a pivotal role in accounting compliance and assist with financial planning. 

Here’s what fixed assets mean and why they matter for small business owners.

What is a fixed asset?

Fixed assets are items a company buys with the knowledge they’ll own them for more than a year. They’re tangible assets you can see, touch, and plan to use for a while. 

Fixed assets are often referred to as PPE: property, plant, and equipment. For example, the fixed assets of a frozen cookie dough manufacturer might include a corporate office (property), a cookie dough factory (plant), and machines that make cookie dough (equipment). 

Fixed assets are also known as non-current assets on a company’s financial statements—assets that can’t be easily converted into cash. Non-current assets can be intangible assets, like investments and intellectual property, as well as real estate and equipment. By contrast, current assets are short-term assets that a company expects to use up, convert into cash, or sell within a year, like cash, cash equivalents, stock, or inventory.

Why are fixed assets important?

Fixed assets are important because: 

• They provide long-term income. Assets like computers, buildings, vehicles, and equipment provide income over time. For example, an artisan jewelry company can’t produce goods without a soldering gun. 
• They’re essential to running operations. These days, the world runs on computers. For most businesses, fixed assets like computers and other technology are essential to ensuring smooth and efficient operations.
• They can increase in value over time. Most fixed assets depreciate over time, but not necessarily all of them. Land and real estate, for example, tend to either hold their value or even increase in value (barring any disasters, of course).

How do companies use fixed assets?

You can use fixed assets for many different business purposes. Use cases tend to fall under the following three categories:

Goods production

If a company makes and sells something, they have fixed assets they use to produce the goods. For example, a coffee roasting company relies on its roaster to process coffee beans every day.

Other examples of fixed assets used for the production of goods include:

• A small fashion brand’s sewing machines
• A furniture maker’s table saw
• A tattoo artist’s tattoo gun
• A maintenance person’s pickup truck
• A content marketing agency’s computers
• A food production company’s small factories or plants

Note that one company’s fixed asset might not count as a fixed asset for another company. For instance, a cybersecurity company might list computer equipment as a fixed asset, while an office supply business that sells computers wouldn’t, because the computer equipment, in this case, is the merchandise.

Third-party rentals

While some businesses use their fixed assets for their own production purposes, other businesses rent out their fixed assets to third parties to generate revenue. For example: 

• A real estate company owns several buildings and leases out space to third-party renters. 
• A car company sells cars but also leases other vehicles out to customers. 
• A farmer rents out a barn on their land for weddings.

Organization

Almost all companies have some fixed assets they use to organize their business operations—perhaps to facilitate transactions, expedite work, or protect other assets. 

For example, the operational fixed assets of a home goods store might include a point-of-sale system, computers for owners and buyers, and a security system for the storefront.

How do you calculate the value of fixed assets?

Calculate the value of fixed assets by subtracting the accumulated depreciation expense by the purchase price plus any improvements. 

Let’s use the cost of an embroidery machine as an example: The purchase price was $2,500, but you paid $20 in delivery fees and $300 in installation costs. The total purchase price plus improvements is $2,820.

The straight-line method is the simplest way to calculate how the value of the machine decreases over time. The formula is: 

Annual depreciation = (Cost of asset – salvage value) / useful life 

In this case, the embroidery machine has a salvage value of $500. That’s how much you can expect to get back after disposing of it after its five-year lifespan. The annual depreciation would be $464, calculated by subtracting the cost of the asset ($2,280) from the salvage value ($500) and dividing it by five years.

To calculate the value of the fixed asset, subtract the purchase cost ($2,820) from the accumulated depreciation ($464). In this case, the value of the embroidery machine after one year is $2,356. 

Examples of fixed assets

Here are some common examples of fixed assets: 

Land

Land is considered a fixed asset if you use it for business purposes. If you buy land and build a storage facility on it, for example, the land is a fixed asset. The biggest difference between land and typical fixed assets is that it doesn’t depreciate. Land tends to increase in value over time. 

Buildings

Buildings such as warehouses, retail locations, and office space are considered fixed assets if your business owns them. 

Machinery and equipment

Machinery is a necessary fixed asset that most businesses use to manufacture goods. If you sell clothes online and you have a sewing machine, screen printer, and industrial steamer to create apparel, you can consider each piece of equipment a fixed asset. 

Vehicles

Vehicles that you use for business purposes can be considered a fixed asset. If you’re delivering parcels to customers within a certain radius of your warehouse, for example, the car or van you’re using to transport orders can be recorded as a fixed asset on your business’s balance sheet.

Furniture

Furniture is considered a fixed asset because it’s a tangible resource intended for long-term use. Examples include office furniture, inventory shelving units, and display fixtures, such as retail signage within a brick-and-mortar store.

Tools

Tools that you’ll use for more than a year (and won’t resell) can be considered a fixed asset. You’ll most often see this on balance sheets for businesses that offer production, manufacturing, or maintenance services. A washing machine manufacturer, for example, would consider an industrial power drill a fixed asset. 

Disadvantages of fixed assets

While fixed assets offer a lot of value, there can be some downsides: 

Value depreciation

Most fixed assets depreciate over time. Think of your car, for example—it lost value as soon as you drove it off the dealership’s lot. 

The same applies to business assets: In a few years, a delivery vehicle likely won’t be worth its original value. But that doesn’t mean it doesn’t have any value. Instead of thinking of its value in terms of how much money you could resell it for, think of its value as how much money its use brings into your business.

Large investments

Everything in the categories of property, plant, and equipment, or PPE, will set your business back a lot financially. The key is ensuring that the long-term return on investment outweighs the initial cost. 

For example, if an espresso machine costs your coffee company $10,000 but it’s able to make $200,000 worth of espresso over its lifetime, the return on investment (ROI) outweighs the original cost.

Acquisition and disposal of fixed assets

Fixed asset accounting and tax reporting rules mean that you’ll need to record the acquisition and disposal of any fixed assets. The easiest way to do this is through journal entries. 

In the journal entry for the acquisition of a new fixed asset, include the total purchase price—including the retail price and any additional costs, such as implementation fees or delivery charges. Each year, calculate depreciation and record this as an additional journal entry.

To dispose of a fixed asset, record the transaction and add a new journal entry that shows the gain or loss. Compare the net book value with the cost of accumulated depreciation to get this disposal figure. Bear in mind that businesses in the US are generally taxed on any gains from the disposal of a fixed asset.

Depreciation of fixed assets

Because most fixed assets depreciate (i.e., decrease in value) over time (except land and real estate, which often hold or even increase in value over time), fixed assets can pose a bit of a problem on your company’s balance sheet. You don’t want to have a massive bump in the fair market value of your assets one year, only to have it drop suddenly the next, setting off the balance of your book value.

Instead, you can list fixed assets as line items over the period you own them. For example, a frozen cookie dough manufacturer might need a new industrial dough mixer—not a cheap investment—which would throw off their balance sheet if it were only listed for the year they bought it. 

Rather, the cookie company can estimate how much the mixer depreciates yearly due to normal wear and tear. They can then spread these numbers across the period they think they’ll use the mixer—perhaps over the next five years. This reflects the mixer’s actual value to the company each year and prevents an imbalance that could give an inaccurate picture in their financial reporting and planning.

What is the life cycle of fixed assets?

Fixed assets are considered to have a life cycle, which describes the total time you have the asset between acquisition and disposal. You’ll need this lifespan to calculate the fixed asset value on your balance sheet. 

In the case of the cookie company’s dough mixer: The business owner might start the acquisition process on January 1, 2024. This is the date they begin researching their options, comparing manufacturers, and completing their purchase. The installation is complete on March 1, 2024.

The business uses the dough mixer every day, and the manufacturer said it has a typical lifespan of five years. At this point, the machine needs to be replaced.

Because the machine wasn’t up and running until March 1, the five-year lifespan begins from this date. The fixed asset would be considered at the end of its life cycle on March 1, 2029—a total lifespan of five years.