A fixed asset is a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. Fixed assets are not intended for sale but are to be used or have benefits enjoyed over a period of more than a year. Examples can include buildings, machinery, or office equipment.
1. What’s the difference between fixed assets and current assets?
Fixed assets and current assets are both assets owned by a company. However, fixed assets are long-term investments, which means the company plans to use them to generate income over several years. On the other hand, current assets are short-term assets, like cash or accounts receivables, meant to be converted to cash or used up within a year.
2. How is a fixed asset’s value determined?
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The value of a fixed asset is usually reflected by its purchase price, less the accumulated depreciation since the asset was acquired. Depreciation is the method to allocate the cost of the asset over its useful life.
3. What is Depreciation in terms of Fixed Assets?
Depreciation is a method of allocating the cost of a physical asset over its expected life. It represents the gradual wear and tear of an asset over time. For fixed assets like machinery or equipment, depreciation could be reflected in their decreasing efficiency or functionality.
4. Can a vehicle be considered a fixed asset?
Yes, a vehicle can be considered a fixed asset if it’s owned by a company and used for business operations for a period exceeding one year. It’s often subject to depreciation due to wear and tear.
5. How does selling a fixed asset impact a company’s finances?
Selling a fixed asset can have several impacts on a company’s finances. The company may generate income or loss, depending on the sale price in relation to the asset’s book value. It also means the company will no longer bear the depreciation of the sold asset. However, the company might need to reinvest to substitute the sold asset if it’s crucial for operations.