Fixed Assets - Definition and examples

Assets are items of value owned by a company. They are shown on its balance sheet. Most financial statements will break down asset holdings into fixed assets, non-current assets or current assets depending on their specific characteristics.

What are fixed assets?

Fixed assets are tangible assets that a business expects to own for more than a year. Non-current assets are intangible assets that a business also expects to own for more than a year. Current assets are those a business expects to own for at most a year.

Fixed assets examples

In business, fixed assets are often called “property, plant and equipment” (PP&E). That is because most fixed assets are items that have been bought to serve a business purpose. Typical examples of PP&E include land, buildings, vehicles, machinery, and IT equipment.

Such items are clearly significant purchases. Fixed assets generally are higher-value items. In simple terms, there is generally a strong link between the price of an item and how long it is expected to last. But it’s important to note that the definition of a fixed asset hinges on its expected lifespan rather than its price.

For example, say a jeweller bought an ergonomic mouse and a batch of diamonds. The mouse is clearly the lower-priced purchase, but the jeweller expects it to last at least two years. It is therefore a fixed asset. By contrast, the jeweller expects to use the diamonds in a commission they need to complete within a month. The diamonds, therefore, are current assets.

From a practical perspective lower valued fixed assets do not need to be tracked and can be treated as an expense in the profit and loss account. This is because they will not skew the numbers greatly and tracking assets is time consuming. We recommend expensing any asset purchase of less than £2,000, but it depends on the size and nature of the business. Please reach out to us if you want further guidance.

Depreciation of fixed assets

Most businesses buy assets because they need them for their operations, which means they only have value to the business for as long as they can be used. Businesses know how long this is likely to be when they buy them. They, therefore, reduce the book value of the fixed asset each year over its lifecycle. This is known as depreciation.

Depreciation has two advantages to businesses. First, it gives a relatively accurate reflection of the asset’s contribution to the business. Fixed assets tend to deliver the most value when they are new. As they age, they may begin to suffer from wear and tear. Even if they don’t, they are likely to be superseded by other options. Eventually, they need to be replaced.

Second, depreciation allows a business to account for the cost of an item over two or more years. This avoids fluctuations in its financial statements every time a new fixed asset is purchased and thus gives a more realistic view of the business’ overall performance.

A fixed asset has certain implications on a company’s financial statements. When a company purchases a fixed asset, they record the cost as an asset on the balance sheet instead of expensing it onto the income statement. Due to the nature of fixed assets being used in the company’s operations to generate revenue, the fixed asset is initially capitalized on the balance sheet and then gradually depreciated over its useful life. For example, a company that purchases a printer for £1,000 would record an asset on its balance sheet for £1,000. Over its useful life, the printer would gradually decapitalize itself from the balance sheet.

However, depreciation shows up on the income statement and reduces the company’s net income. For example, a company that purchases a printer for £1,000 with a lifecycle of 10 years would record a depreciation of £100 on its profit and loss statement annually.

Non-depreciable fixed assets

Some fixed assets cannot be depreciated. In the context of business, the most obvious example of a non-depreciable asset is land. This is expected to keep its intrinsic value. In fact, it may even increase in value. Buildings, by contrast, can be depreciated (providing they are owned rather than rented or leased).

Collectables such as art and antiques are likewise not eligible to be depreciated. They are also expected to retain their value or even increase in value. It is, however, fairly unusual for businesses to have these assets.

Annual investment allowance

The last thing to consider is how much you can claim through the annual investment allowance. The AIA is a kind of capital allowance, which offers tax relief at 100 per cent on qualifying expenditure in the year of purchase, so is intended to encourage greater investments. It is important to note that you cannot claim AIA on business cars, items you owned for another reason before you started using them in your business and items given to you or your business. Currently, the AIA amount is £1 million between 1st January 2019 and 31st March 2023.

This information is correct at time of writing, please refer to the government website for any updates.