A fixed asset is a tangible economic resource which is expected to provide economic benefits to the firm beyond the greater of one year or an accounting cycle.
Fixed assets are intended for use in the production of goods or services. In other words, fixed assets are not intended for resale but are rather used in business operations.
Fixed assets are not immediately expensed. Rather, fixed assets are capitalized – i.e., recognized as assets on the balance sheet. Fixed assets are then depreciated – expensed over time – up to their estimated salvage values. The fixed assets are then carried on the company’s balance sheet at their acquisition costs less accumulated depreciation. One exception to this accounting treatment is land, which is not depreciated.
Fixed assets can also become impaired. An impairment is a decline in the value of an asset below the asset’s current carrying value. If a company determines that an asset has become permanently impaired, the company must write down the asset’s value. This write-down is accomplished by reducing the asset’s carrying amount and recording a corresponding expense. The write-down will also require an adjustment to the asset’s future depreciation.
Some fixed assets are expensed immediately. This occurs when the asset’s purchase price is below the company’s capitalization limit. Companies set a capitalization limit to reduce the accounting labor involved in capitalizing assets. Capitalization limits will vary from company to company.
