Companies acquire fixed assets as long-term tangible property. These assets are used in daily business operations to generate income for the business. Often referred to as the ‘capital’ of the business, they include items such as machinery and plant equipment. Their defining feature is that they are not converted into cash in the first year of acquisition. Firms tend to invest in fixed assets for the following objectives:
- To enable the production or supply of business goods and services
- To act as rentals for third parties
- To be used in regular organizational workflows
People often ask how fixed assets are different from inventory. Business inventory is defined as any current asset in the financial database of your organization. Goods classified as inventory signify the company’s worth and can be easily cashed out to cover up any existing debts. For simplicity, inventory can be divided into four categories:
- Raw materials needed for manufacturing items
- Goods and services in progress
- Finished goods
- Maintenance, repair and operating supplies
As you can see, this is completely different from a fixed asset, which is often a finite, long-term investment. Another point that must be clarified is that fixed assets don’t have to be ‘fixed’ in the sense of being stationary or immobile. They can easily be moved around from one location to another, with vehicles and computer equipment being good examples of this.