Fixed assets are long-term tangible assets that a company owns and uses to produce income. Unlike current assets such as cash, fixed assets are not expected to be sold within a year. These assets are vital for any business, and their management is often a critical aspect of overall success.
Fixed assets are essential because they can generate income for a business over an extended period. They help to increase the production capacity of the firm, boost revenue growth, and enhance profitability. Moreover, proper management of these assets can lead to greater efficiency and productivity, making the business more competitive in the marketplace.
Fixed assets come in different shapes and sizes; some examples include buildings, land, machinery, equipment, vehicles, furniture, computers, and patents.
The valuation of fixed assets is crucial for determining their worth on the balance sheet. There are various methods for valuing these assets; some common approaches include cost-based valuation (historical cost), market-based valuation (fair value), and income-based valuation (discounted cash flow).
Depreciation refers to the reduction in value of fixed assets over time due to wear and tear. Businesses use various depreciation methods for calculating this reduction; some popular ones include straight-line depreciation, declining balance method, sum-of-the-years-digits method.
Capital budgeting is a process that helps businesses determine which fixed asset investments will yield the highest returns on investment. This process involves analyzing potential projects based on their cost-benefit ratio and assessing their feasibility against specific financial criteria such as payback period or internal rate of return.
Asset acquisition financing options include loans from financial institutions or lease financing from asset leasing companies. These financing options are essential for businesses that do not have enough cash available to purchase the assets outright.
Asset disposal strategies include selling, donating, and scrapping fixed assets. These strategies are vital for businesses that want to free up resources or upgrade their fixed asset portfolio.
