What are Fixed Assets, and Why Should You Track Them?
A company’s most valuable long-term assets? They’re not the ones you think! In this article, we explore what fixed assets are (and why they’re so important), how organizations can effectively manage them– and the common mistakes that are too often made.
What is a fixed asset?
In general, the assets of an organization can be classified into two categories: current or non-current. Current assets include cash, accounts receivable, and inventory, while non-current include long-term investments, property, and equipment– known as fixed assets.
Although the term “fixed” may seem misleading, as assets are not always stationary and can be moved from time to time, they are considered fixed because they cannot be easily converted into cash without great expense.
Fixed assets are items that a company owns and expects to use in its operations for more than one year. This includes include buildings, machinery, computers, vehicles, furniture, and equipment.
A manufacturing company may have machinery, computers, and equipment that it uses to produce goods. A restaurant would have tables and chairs for dining guests as well as a stove, ovens, sinks, dishwashers—all types of fixtures needed in the kitchen area. These are all examples of fixed assets because they will be used over one year or more.
Why do we need them?
Assets like property, plant equipment, furniture, and fixtures are critical to stay open and profitable; they provide the basic infrastructure or foundation on which organizations build their businesses.
The value of an organization’s fixed assets can be considered part of its total assets, which is a measure of the company’s overall size and financial strength. For example, if you have $100 million in current assets and $50 million in non-current (fixed) assets, your total asset base would be $150 million.
Why should organizations track their fixed assets?
Organizations need accurate records to effectively manage them so they’re cost-effective and used for the right purposes. Tracking enables us to make good decisions about whether an asset needs replacement or modernization, or if we are using it for the right purposes.
As your organization grows in size and complexity, the need for accurate tracking will grow as well. Managing a growing inventory of fixed assets can be difficult and expensive, but an accurate tracking system will help managers plan better by knowing what their fixed assets are worth and how much depreciation they should expect to incur over time.
The benefits of tracking your company’s fixed assets
- When you have an up-to-date understanding of your fixed assets and their value, there are a number of ways that this data can be used effectively:
- You will know which items need more careful management or replacement (e.g., old computers, long-outdated software
- You will be able to predict the date on which certain assets are expected to wear out and need replacement
- With accurate data about your fixed assets in hand, you can more confidently make decisions
This enables effective management which will lead to cost-savings and better decision-making about how best to use our long-term assets. In addition, accurate record-keeping allows us to benefit from tax advantages that are available only when we track those costs.
How should organizations track their fixed assets
Organizations should keep good records of the acquisition, use and eventual disposal of any asset it owns so that financial statements are accurate and useful for decision-making purposes. This includes recording cost information such as purchase price or accumulated depreciation; where the asset is located; the asset’s current value, and how it will be disposed of.
In order to be most effective, management of fixed assets must start with an up-to-date inventory of what you own at your business location(s). To keep this list current, it needs to be updated regularly to properly account for any items being used in the company’s operations.
Tips for managing your company’s fixed assets effectively
- An accurate tracking system will help managers plan better by knowing what their fixed assets are worth and how much depreciation they should expect to incur overtime.
- Be mindful of the difference between what you own and what you lease. The former are called “owned” or “capitalized” items while leased items form a part of an organization’s expense. Fixed assets should be considered as owned in order to use them efficiently but leased assets should be recorded as an expense.
- Keep separate records of fixed assets that are leased for use by the company and those used solely in other businesses (as this is a contribution to equity).
- Track depreciation both right away when it happens, and also on an annual basis so you can see how much has been written off and adjust the records accordingly.
- Keep good, accurate, and up-to-date records so you can make better decisions about your assets; this will also help you track costs for tax purposes.
Common mistakes that companies make when they track their fixed assets:
- Failing to keep separate asset management books (one for owned assets, and one for leased)
- Not tracking the depreciation of each asset over time as it is used.
- Failing to record information such as purchase price or accumulated depreciation; where the asset currently is located; current value and disposal plans– which will lead to inaccurate financial statements.
- Allocating costs into the wrong asset account, which will lead to incorrect financial statements.
It is important to track fixed assets so they can be managed and used wisely. If this blog post has given you ideas for taking care of your company’s fixed assets, you may be interested in reading more on the subject. Here’s a link to our comprehensive asset tracking guide for busy professionals.