Sunday, June 24, 2018

Fixed Assets and Depreciation

A fixed asset is a physical item, such as a piece of equipment, a vehicle, or real property.  Fixed asset expenditures must be “capitalized;” that is, they are listed as assets on the balance sheet, as opposed to being expensed on the income statement.  Fixed assets are considered non-current, and they are listed on the balance sheet at their historical costs.

Fixed assets are “depreciated” over time, and “depreciation” is an expense that is listed on the income statement.  Each period, a fixed asset receives some depreciation write-down until its useful life is used up.  The length of time over which a fixed asset is depreciated very roughly approximates its useful life.  For example, a computer may be depreciated over five years, while a building may be depreciated over twenty or even as many as forty years.

The balance sheet usually lists gross amounts of fixed assets (at historical cost) in categories such as “Office Equipment,” “Vehicles,” and “Real Estate.”  The sum of these amounts represents “Gross Fixed Assets.”  “Accumulated Depreciation” is typically listed next, consisting of the sum of all depreciation expense, past and present.

So, on the balance sheet, “Gross Fixed Assets” less “Accumulated Depreciation” equals “Net Fixed Assets.”

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