Fixed assets are long-term resources like property, equipment, and intellectual property that businesses use to generate revenue over multiple years, appearing on the balance sheet and depreciating in value over time rather than being expensed immediately.
Fixed assets are long-term tangible or intangible resources that your company uses in its operations to generate revenue over multiple years rather than being consumed within a single accounting period. Unlike inventory or office supplies that get used up quickly, fixed assets represent significant investments in your business's productive capacity, such as buildings, machinery, vehicles, computers, and intellectual property like patents or trademarks.
On your company's balance sheet, fixed assets represent a crucial component of your total assets, providing insights into your company's investment in long-term growth. These assets are not intended for resale but rather for sustained use in producing goods, delivering services, or supporting administrative functions. Their value gradually decreases over time through a process called depreciation (for tangible assets) or amortisation (for intangible assets), reflecting their consumption and wear and tear.
Understanding fixed assets is essential for any business owner because they affect everything from your financial reporting to your tax planning. Proper management of fixed assets ensures accurate financial statements, helps with strategic planning for capital expenditures, and ensures compliance with accounting standards and tax regulations.
The fundamental distinction between fixed assets and current assets lies in their intended use and timeline within your business operations. Fixed assets are resources you expect to use for more than one year to generate long-term value, such as office equipment or company vehicles. Current assets, by contrast, are resources you expect to convert to cash or use up within one year, including cash itself, accounts receivable, and inventory.
This classification matters for several reasons. On your balance sheet, fixed assets appear in the non-current assets section, while current assets appear separately. This separation helps investors and lenders understand your company's liquidity and long-term investment strategy. A company with substantial fixed assets relative to current assets might have different cash flow requirements than one with minimal long-term investments.
From a tax perspective, the distinction also matters considerably. Whilst current assets like inventory are typically expensed when sold, fixed assets are capitalised and depreciated over their useful life. This accounting treatment affects your taxable income in each accounting period, making accurate classification essential for proper tax planning and compliance.
Fixed assets encompass both tangible and intangible categories that support your business over multiple years. Tangible fixed assets include physical items like land, buildings, office furniture, computers, manufacturing equipment, vehicles, and leasehold improvements. These are items you can see and touch that contribute to your operations over an extended period.
Intangible fixed assets represent non-physical resources that provide long-term value, such as patents, trademarks, copyrights, software licenses, and goodwill acquired through business acquisitions. Whilst intangible assets don't have physical substance, they can be among your company's most valuable resources, particularly in knowledge-based industries like technology or creative services.
The key qualification for an asset to be classified as fixed is its expected useful life extending beyond one year and its purpose in your business operations. A laptop used by your employees for daily work would be a fixed asset, whilst printer paper would be an expense. The threshold amount for capitalising an item as a fixed asset varies by company policy but is typically set at a material amount, such as €500 or more, to avoid administrative burdens tracking very small items.
Recording fixed assets begins when you purchase or acquire them, requiring you to capitalise their cost on your balance sheet rather than expensing them immediately. The initial recording includes the purchase price plus any directly attributable costs like delivery fees, installation charges, and professional fees necessary to get the asset ready for its intended use.
On your balance sheet, fixed assets appear at their historical cost less accumulated depreciation. This net book value reflects the asset's remaining economic value to your business. Each accounting period, you'll record depreciation expense on your income statement, which reduces both the asset's book value on the balance sheet and your taxable income.
Maintaining a fixed asset register is a critical practice for accurate financial reporting. This detailed record tracks each asset's purchase date, cost, depreciation method, accumulated depreciation, and current book value. A well-maintained asset register not only supports your financial statements but also helps during due diligence processes when investors or potential buyers want to verify your company's asset base.
Depreciation is the systematic allocation of a fixed asset's cost over its estimated useful life, recognising that tangible assets lose value through wear and tear, obsolescence, or simply the passage of time. This accounting practice matches the expense of using the asset with the revenue it helps generate across multiple accounting periods, providing a more accurate picture of your business's profitability.
The most common depreciation methods include straight-line depreciation, which spreads the cost evenly over the asset's life, and reducing balance depreciation, which applies a higher expense in earlier years. Your choice of method depends on the asset type and your accounting policies, with straight-line being simpler and reducing balance reflecting faster loss of value for certain assets like vehicles or technology.
Depreciation affects your financial statements in two significant ways. First, it reduces your net income on the profit and loss statement each period, lowering your taxable profit. Second, it reduces the carrying value of fixed assets on your balance sheet through accumulated depreciation. Understanding depreciation is essential for making informed decisions about when to replace assets and how to plan for capital expenditures.
When you sell a fixed asset, you must calculate any gain or loss on disposal by comparing the sale proceeds with the asset's net book value at the time of sale. If you sell an asset for more than its remaining book value, you record a gain on disposal, which increases your taxable income. Conversely, selling for less than book value creates a loss that reduces your taxable income.
This disposal process requires several accounting entries. First, you remove the asset's original cost from your fixed asset account and eliminate the related accumulated depreciation. Then, you record the cash received and recognise the gain or loss on disposal in your profit and loss statement. Proper documentation of asset disposals is important for both financial reporting and tax compliance purposes.
For tax purposes in Ireland, the gain or loss on disposal may have capital gains tax implications if the asset sold is not trading stock. However, many business asset disposals qualify for reliefs or allowances that can reduce or eliminate capital gains tax liabilities, making it worthwhile to consult with your accountant before finalising any significant asset sales.
Generally, you cannot expense a fixed asset immediately because accounting standards require capitalising assets with useful lives exceeding one year and depreciating them over time. Immediate expensing would distort your financial statements by understating assets and overstating expenses in the purchase period, followed by understated expenses in subsequent periods when the asset continues to provide value.
However, there are exceptions and tax incentives that allow for accelerated deductions. Ireland's capital allowances scheme provides for accelerated capital allowances on certain energy-efficient equipment, allowing businesses to deduct a higher percentage of the cost in the first year. Additionally, the Annual Investment Allowance (AIA) permits businesses to deduct the full cost of most plant and machinery purchases up to a specified limit in the year of acquisition.
For small-value items that individually fall below your company's capitalisation threshold, you may expense them immediately as they're considered immaterial to your overall financial position. Establishing a clear capitalisation policy helps ensure consistent treatment of asset purchases and prevents confusion about what should be capitalised versus expensed.
