Fixed assets are important real estate such as homes, cars, investment property, stocks, bonds, and even collectibles or works of art. For businesses, a fixed asset is an asset with a useful life of more than one year and which is not intended to be sold in the normal course of business. This also makes it a type of cost of production. For example, if a business buys a computer for use in their office, the computer is a capital asset. If another business buys the same computer for sale, it is considered inventory.
Key points to remember
- Fixed assets are assets that are used in the business operations of a company to generate income over more than a year.
- They are recorded as an asset on the balance sheet and expensed over the useful life of the asset through a process called depreciation.
- Expensing the asset during its useful life allows the cost of the asset to match the revenue it has generated during the same period.
Companies and fixed assets
A fixed asset is generally held for its role in the ability of the business to generate profits. In addition, the benefits derived from the asset are expected to extend beyond a period of one year. In a company’s balance sheet, fixed assets are represented by the figure for tangible fixed assets.
Examples of tangible capital assets include land, buildings and machinery. These assets can be liquidated in the worst case scenario, for example if a company restructures or declares bankruptcy. In other cases, a business has capital assets if the business is growing and needs better. For example, a business can sell a property and buy a larger one in a better location.
Companies can dispose of fixed assets by selling them, trading them, abandoning them or losing them in foreclosures. In some cases, the conviction also counts as a disposition. In most cases, if the business has held the asset for more than a year, it incurs a capital gain or loss on the sale. However, in some cases, the IRS treats the gain as regular income.
Fixed assets can also be damaged or become obsolete. When an asset is impaired, its fair value decreases, which will result in an adjustment to the carrying amount on the balance sheet. A loss will also be recognized in the income statement. If the book value exceeds the recoverable value, an impairment charge corresponding to the difference is recognized in the period. If the book value is less than the recoverable value, no depreciation is recognized.
Individuals and fixed assets
Any significant asset held by an individual is capital property. If an individual sells a stock, work of art, investment property or other capital property and earns money on the sale, he realizes a capital gain. The IRS requires individuals to report capital gains on which capital gains tax is levied.
Even the principal residence of an individual is considered a fixed asset. However, the IRS grants couples who jointly file a tax exclusion of $ 500,000 and individuals who file as a single person an exclusion of $ 250,000 on capital gains realized through the sale of their primary residence.However, an individual cannot claim a loss resulting from the sale of his principal residence.If an individual sells a capital asset and loses money, he can deduct the loss from his earnings, but his losses cannot exceed his earnings.
For example, if an individual buys a stock for $ 100,000 and sells it for $ 200,000, he reports a capital gain of $ 100,000, but if he buys a house for $ 100,000 and sells it years later. for $ 200,000, he does not have to declare the gain due to the $ 250,000. exemption. Although home and inventory are both capital assets, the IRS treats them differently.
Recording of fixed assets
The cost of fixed assets may include transportation costs, installation costs and insurance costs related to the purchased asset. If a business purchased machinery for $ 500,000 and incurred transportation costs of $ 10,000 and installation costs of $ 7,500, the cost of the machinery will be recorded at $ 517,500.
When a business purchases fixed assets, the Internal Revenue Service (IRS) considers the purchase to be a capital expense. In most cases, businesses can deduct expenses incurred in a tax year from their income received in the same tax year and report the difference as business income. However, most capital expenditures cannot be claimed in the year of purchase, but rather must be capitalized as an asset and expensed gradually over a number of years.
Using depreciation, a business spends a portion of the asset’s value over each year of its useful life, instead of attributing the entire expense to the year in which the asset is purchased. . The purpose of depreciating an asset over time is to align the cost of the asset with the same year as the income generated by the asset, in accordance with the matching principle of generally accepted accounting principles of states. United (GAAP). This means that each year that the equipment or machinery is put into service, the cost associated with using the asset is recorded. Indeed, fixed assets lose value as they age. The rate at which a company chooses to depreciate its assets can result in a book value different from the current market value of the assets.