While you visit your office to earn your bread, there are structures and facilities that are constantly supporting you to function progressively on a daily basis. These could be the land your enterprise stands tall on, the building it resides in, the computers you operate, the furniture and equipment you use, or even the vehicles that the enterprise would provide for movement of goods or people. All of these are examples of different types of fixed assets. Their meaning is true to the term – fixed assets – as these remain available for days, months, and years to fulfill a comfortable environment. Fixed assets are supportive and secure to conduct the day’s business without having to worry about the basics.

What is a Fixed Asset?

The meaning of fixed asset is easily relatable. An enterprise must be in procurement of prominent assets for long-term use to provide itself security and foundation for lifetime progress. These assets sustain the enterprise and support the entity to form a strong structural or infrastructural base on which it can thrive for a long period of time, usually for more than 10 years.

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A Fixed Asset is also called a non-current asset or categorized as property, plant, and equipment (PP&E). It is an asset which cannot be easily sold to another entity or people.

Types of Fixed Assets

An enterprise would have several types of fixed assets depending upon the usage. These can be broadly categorized on the basis of usage and existence.

1. On the basis of usage:

  • Operative Assets: These assets are used for principal and key operations. These include assets such as building, plant, copyright, machinery, and cash.
  • Non-operative Assets: Some assets are kept as reserves for future use and are not required for the day-to-day functioning of a business. These include securities, deposits, and income from investments. Even though these assets are not required on a daily basis, they provide security and stability to an enterprise.

2. On the basis of existence:

  • Tangible Assets: Some assets are physically present and are easily quantifiable, such as real estate, cash, equipment, supplies, and material. These can be seen to exist and felt in person, and are thus tangible.
  • Intangible Assets: Assets such as copyrights and royalties are not seen and felt in person but these have a financial value. At times, it is quite difficult to assign a value monetarily to these assets. These are referred to as Intangible Assets.

Interestingly, Goodwill too is a fixed and intangible asset. It arises from intangible benefits, business connections, reputation, and prestige earned by the enterprise. It is only taken into consideration when some money or its worth has been paid to the enterprise. In simple terms, the excess money after calculation of the net assets paid to acquire any enterprise is referred to as Goodwill. Goodwill is written off after a considerable span, which eventually does not permit inflated valuations, but many businesses retain it as an asset.

Fixed Asset: Formula

Following aspects must be considered to arrive at the formula for calculating total value of fixed assets.

  • The entity must determine the cost at the time of purchase which would also include the taxes paid, cost at which it was transported and any other price levied to install or procure the asset.
  • The entity must take into account any further improvisations that were made to upgrade the quality and strength of the asset.
  • Impairment or depreciation of value must be considered further to subtract the amount from the values of purchase and upgradation.

The formula would hence be derived as: Cost of purchase and procurement of the asset + Improvisations made on the product – Values of impairment and depreciation of the asset = Total value of the fixed asset

Role of Drip Capital

Drip Capital plays an important role in the management and provision of finances towards fixed assets for enterprises especially SMEs. Drip capital offers a modern meaning to collaterals by using accounts payables and invoices instead of fixed assets. By offering digital trade finance solutions, Drip Capital empowers businesses to liberate the value of their fixed assets, which helps to enhance their capacity to operate and stabilize their finances.

Drip Capital also assists in procuring necessary fixed assets like machinery and equipment to an SME by providing the required working capital using invoice and documentation of the order procured by the business entity. This not only enhances the enterprise’s growth but also ensures that they have the pertinent resources to continue their daily operations.

Drip Capital's involvement also includes maintenance of the value of these assets through products designed to manage depreciation and impairment. The approach becomes comprehensive and guarantees the productivity and longevity of fixed assets, which also makes them valuable on the balance sheet.

A fixed asset is not only a necessity for an enterprise to carry out its daily business but also provides a sense of security to the stakeholders of the company, which includes its employees, customers, investors, shareholders, suppliers, communities, government agencies, and trade unions.

A fixed asset helps to raise the financial status of the company while contributing to its growth. While it is a long-term asset, it is also a permanent resource for the company.

Frequently Asked Questions

1. What is a Current Asset?

Some assets can be converted into cash within the short span of a year. These can also be intermediate that contribute towards making a final product. These reflect in the balance sheet of an enterprise as Current Assets. For example, at a restaurant, goods such as flour, vegetables, milk, and sugar help to make a final product to be served on the table.

2. What is the difference between current assets and fixed assets?

Difference between current and fixed or non-current assets can be illustrated through an example. At a restaurant, the inventory or current assets would include things that are intermediate such as flour, vegetables, milk, and sugar to make a final product for consumption. On the other hand, assets of long-term value such as the real estate housing the restaurant, microwave, oven, dishwashers, cutlery, vehicles for delivery, and bill printers would be non-current or fixed assets.

In a nutshell, current assets are convertible into cash in a short span mostly within a year, whereas fixed assets remain with the enterprise for a long time, mostly for over 10 years.

3. What are the different types of fixed assets?

Types of fixed assets can be categorized on the basis of existence and usage.

A. On the Basis of Usage

  • Operative Assets Used for principal or key operations Examples: Building Plant Copyright Machinery Cash
  • Non-operative Assets Kept as reserves for future use Not required for daily functioning Examples: Securities Deposits Income from investments

B. On the Basis of Existence

  • Tangible Assets Physically present and quantifiable Examples: Real estate Cash Equipment Supplies Materials
  • Intangible Assets Not physically present but have financial value Examples: Copyrights Royalties

4. Is Intellectual Property a Fixed Asset?

Yes, just like royalties, copyrights, and goodwill, intellectual property too is a fixed tangible asset.

5. Why Should Investors Care About a Company's Fixed Assets?

Fixed assets bring stability and status to a company. Mostly, fixed assets do not have recurring costs such as rents to pay. These exist for a long period of time and yet remain a permanent resource.

Fixed assets also define the growth and expansion of a company.

Fixed assets bring security to the enterprise during times of contingency.

6. Is a Car a Fixed Asset?

Yes, a car is a fixed asset. It can sustain for over 10 years and has a long-term value.