Fixed Assets and Its Importance
Most of the business takes revenue into consideration at the time of assessing the value of their business. While such calculation, they tend to forget about one basic thing i.e., Fixed Assets. As they act as a vital component at the time of evaluating your business.
Your financial accounting will not give you a true picture of your business until or unless you have the exact value of your assets.
What Is A Fixed Asset?
A fixed asset is an asset which is not being held for the purpose of being sold that helps in generating revenue. Moreover, fix term in the fixed assets indicates that they are not intended to be liquefied into cash in one operating cycle.
Assuming XYZ Ltd is purchasing a building to carry out their cloth manufacturing work. The purchased building will be fixed asset as it fits the definition of it.
Importance of Fixed Assets
Fixed asset information helps in the valuation of the business and forming accurate financial reports with the help of financial analysis.
Using such reports financial health of a company can be determined by the Investors and creditors that help them to decide when to buy shares or give a loan to the business.
At the time of analyzing financial statements, you need to check the notes to accounts carefully as different business uses different methods of recording. Some of the commonly accepted methods of recording are depreciation and asset disposal method.
Depreciation of Fixed Assets
Depreciation is that part of a cost of the fixed asset that is recorded as an expense during a financial year. In other words, depreciation of fixed assets shows such part of its value utilized during the financial year.
There are different ways to calculate depreciation on fixed assets. Some of the common ways that are used by the business are
- Straight Line Method
- Diminishing Value Method
- Units of Production
- Sum of Years Digits
Types of Fixed Asset
Fixed assets are classified into four type tangible assets, capital work in progress, intangible assets and intangible assets under development. Let us discuss them in briefly:
The assets which can be touched, felt and seen are tangible assets. In other words, these are those assets which have a physical presence. Some of the common examples of tangible fixed assets are:
- Plant & Machinery
Capital Work in Progress (CWIP)
The tangible assets that are not completed or not in working condition at the time when the balance sheet is prepared fall under the category of Capital work in progress (CWIP). So, at the time of balance sheet preparation, the total cost incurred on such asset is transferred to Capital work in progress account (CWIP).
Intangible fixed assets are those assets that cannot be touched felt or seen. Moreover, intangible assets are those which have future economic value but do not have a physical presence. Some of the common examples of intangible fixed assets are:
Intangible Assets Under Development
The cost of developing an intangible asset that is not complete falls under the heading of Intangible assets under development.
For instance, if you want to take copyright but you did not receive any copyright till the balance sheet date. The amount incurred to get the copyright until the date of the balance sheet will fall under the category of Intangible assets under development.