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What is Fixed Asset and how to identify one?

Finance Management

What is Fixed Asset and how to identify one?

Fixed assets are physical assets of the company that can be touched. But this does not mean that any material good is a fixed asset. The item essential for the entity’s production is characterized as fixed assets. In short, it must be directly linked to the operational activities that generate the company’s results. If you have a material asset, but it is “idle”, unused, it cannot be considered fixed assets.

What is an asset?

To begin with, it must be made clear that an asset is a good or right that the entity controls and from which future financial gains are anticipated. Although it must be under the company’s management, it need not be owned by it.

What is fixed asset?

The first thing we must consider when we talk about fixed assets is that it refers to a tangible asset. Furthermore, it has a useful life of more than one year and is used in the company’s main operational activities. Furthermore, it must have a “permanent” characteristic. In other words, there is no intention of getting rid of this asset. This way, it becomes easier to imagine what these assets are.

Some examples of what fixed assets are:

  • Machinery;
  • Furniture and furnishings;
  • Buildings;
  • Computers;
  • Vehicles.

However, care must be taken not to confuse them with those that do not fit as an example of fixed assets. These are:

  • Properties and land held by an entity to obtain income;
  • Biological assets;

Current and non-current assets

In summary, the balance sheet displays two types of assets: current and non-current. According to this perspective, non-current assets, or the company’s long-term rights, comprise investments and financial applications, of which fixed assets are a part.

In other words, current assets are those assets and rights that are transformed into money in a short period of time. While non-current ones are those that have long-term income, over a year or an indefinite period of time.

How are fixed assets accounted for?

In short, the acquisition value of the asset determines the value that this fixed asset will appear on the balance sheet. However, it is important to consider that all expenses necessary for the asset to be in full condition to generate the expected benefits are added to the value of the asset instead of being considered as expenses.

For example:

Assuming you purchased a machine for your business production and it is in another condition and disassembled.

This way, you will have additional expenses with shipping, the assembler and the installation service. Therefore, all these costs are added to the value of the asset.

In short, spending on something that will only generate economic benefits in the future cannot impact the current result.

However, this does not mean that this asset will never generate expenses. Over time, when there is already a benefit provided by this asset, the impact on the results occurs through depreciation, amortization or exhaustion.

It is worth remembering that fixed assets cannot be revalued. In other words, the value of the property or land does not occur throughout the year. Fixed assets do not consider this variable. Therefore, the asset record will always remain the same acquisition value and, over time, it is reduced from depreciation.

How does depreciation work?

As time goes by, assets and acquisitions, in general, are subject to physical wear and tear. Accounting is constantly responsible for finding data that reflects the company’s real scenario.

Assume, from the same vantage point, that you paid $50,000 for your car. After five years, will the identical car still be worth $50,000? Not at all. In accounting, this is referred to as depreciation expense.

It is worth mentioning that, even if assets maintain good periodic maintenance, they must still be depreciated.

Having your asset depreciate over time can feel like a loss and disadvantage, but there are benefits to this. By recording depreciation, the company can account for it as an expense, which reduces the amount of accounting profit and, therefore, you pay less income tax and social contribution .

In principle, in the case of companies under the Real Profit regime , identification of depreciation is mandatory.

Calculation of depreciation of a fixed asset

There are several methods for calculating the depreciation value of an asset. The best known are: the linear method, units produced, sum of digits and hours worked.

The choice is up to the company, which decides which formula will bring the most accounting benefits to it.

Linear Method

The linear depreciation calculation is discussed first. This formula has a set value and is as follows: linear depreciation = (Acquisition cost – Residual value) / Useful life.

The amount spent on the asset at the time of purchase is known as the acquisition cost, and the item’s residual value is its value at the end of its useful life. One of the most popular methods among entities is this one.

Units of Production Method

Secondly, we have the units of production method, recommended for companies that work with production. Basically, the consumption of the asset is assessed according to the units it produces. Therefore, in the years in which the machine is used more and produces more goods, the depreciation will be greater.

In this case, to find out the depreciation rate, the formula is used:

Units produced in the period / units produced during the useful life of the asset = Depreciation rate

Sum of Digits Method

The sum-of-digits depreciation method is an additional option. In this instance, a portion of the asset’s annual depreciable cost is deducted.

The fraction is made up of a numerator that represents the asset’s remaining useful life and a denominator that represents the total number of years left in the asset’s useful life.

Method of Working Hours

The “working hours” technique is the last one. It essentially divides the total number of hours taken into account across the asset’s useful life by the number of hours worked during the period.

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