Fixed Asset Definition | Examples, Journal Entries & Acquisition Methods

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Fixed Asset Definition | Examples, Journal Entries & Acquisition Methods

What are fixed assets? What distinguishes them from inventory? In this article, we comprehensively explains the definition of fixed assets, including their examples, characteristics, methods of acquisition, and journal entries in a simple way.

Fixed Asset Definition

Fixed assets are non-current, tangible assets owned and used by a company in its operations to generate income. Fixed assets have greater useful lives than current assets and are not expected to be consumed or converted into cash within a year. Fixed assets are different from inventory items, because the latter are purchased for the purpose of resale, while the former are purchased for operational purposes.

Fixed Asset Characteristics

Fixed assets are acquired for the purpose of producing or supplying goods or services, for leasing to third parties, or for use in the company. The term “fixed” indicates that these assets will not be used up or sold in the accounting year. A fixed asset usually has a physical form and is reported on the balance sheet as property, plant and equipment.

Fixed assets are initially recorded as assets, and then subject to general accounting transaction types such as:

  • Periodic depreciation (for tangible assets) or amortization (for intangible assets)
  • Impairment write-downs (if the value of an asset declines below its net book value)
  • Disposition (once assets are disposed of)

When a company acquires or disposes of their fixed assets, this must be recorded on the cash flow statement. The purchase of fixed assets is a cash outflow to the company, while the sale of fixed assets is a cash inflow. If the value of an asset falls below its net book value, the asset is impaired. The value of the fixed asset recorded on the balance sheet is adjusted downward, because it is considered too high compared to the market value.

When a fixed asset has reached the end of its useful life, it is usually sold in an attempt to obtain a residual value, which is the estimated value of the asset if it was broken down and sold in parts. In some cases, assets may become obsolete and unsuitable for sale. If this happens, they will most likely be donated and the company won’t receive any payment in return. However, whether sold or not, the fixed assets must be written off from the financial statements, because they are no longer used by the company.

Note: An asset management system can greatly help extend the lifespan of your fixed assets through automated tracking and maintenance scheduling.

Examples of Fixed Assets

Fixed Asset Definition | Examples, Journal Entries & Acquisition Methods

Here are some examples of fixed assets:

  • Land
  • Buildings
  • Vehicles
  • Factories
  • Machines
  • Furniture

A fixed asset does not have to be something immovable. Many fixed assets are portable enough to be routinely moved inside or outside of a company’s premises. Thus, a computer or a laptop can be considered a fixed asset (as long as its cost exceeds the capitalization limit).

Read the related article:

Fixed Assets & Depreciation | Accounting Principles

Fixed Asset Acquisition Methods & Journal Entries

After understanding the definition of fixed assets, including their characteristics and examples, let’s find out how they are acquired and reported on the balance sheet!

A. Through Cash Purchases

A fixed asset that is acquired through a cash purchase is recorded in the books with the amount of money spent on it. The amount of money spent to acquire the fixed asset includes the price listed on the invoice and all costs incurred to make the asset ready for use.

Example:

A company buys a machine for Rp. 60,000,000, the related additional costs include VAT for Rp. 6,000,000, an insurance premium for Rp. 500,000, and an installation fee for Rp. 1,500,000.

How it is reported on the balance sheet:

Purchase Price 60,000,000
VAT 6,000,000
Insurance Premium 500,000
Installation Fee 1,500,000
Acquisition Cost 68,000,000

 

B. Through Credit Purchases

If a fixed asset is acquired through a credit purchase, then the acquisition cost may not include interest. Whether the interest during the installment period is clearly stated or not, it must be excluded from the acquisition cost and charged as interest expense.

Fixed Asset Definition | Examples, Journal Entries & Acquisition Methods

Example:

A company buys a vehicle on credit for Rp. 300,000,000. The company partially pays Rp. 100,000,000 in cash, and pays the rest with installments in 10 months at an interest fee of 10%.

How it is written off the balance sheet:

Vehicle Acquisition Cost  300,000,000
Cash 100,000,000
Accounts Payable 200,000,000
Installment Fee per Month (10x) 20,000,000
Interest Fee of 10% x 10 Months 20,000,000

 

C. Through Convertible Security Exchanges

A fixed asset obtained through a convertible security exchange is recorded on the balance sheet according to its stock market price. If the market price of the convertible security and the fixed asset exchanged is unknown, then the exchange value must be determined by the company leader. This exchange value is used as a basis for recording the acquisition cost of the fixed asset and the convertible bond.

Example:

A land with a fair market price of Rp. 400,000,000 acquired by a company in exchange for one of its buildings. The acquisition cost of the office building according to journal entries, amounted to Rp 500,000,000 and was depreciated at Rp 200,000,000.

How it is reported on the balance sheet:

Land Market Price 400,000,000
The Cost of Exchanged Building 500,000,000
Depreciable Cost of the Building 200,000,000
Depreciated Cost of the Building 300,000,000
Profit 100,000,000

 

D. Through Non-Monetary Asset Exchanges

Many fixed assets are acquired through non-monetary asset exchanges. The old assets are used to pay for the new ones, either fully or partially, where the shortfall is paid in cash. In this case, the acquisition cost must still be included, with the new asset being capitalized at the amount of the price of the old one, added by the money (if any) or capitalized at the market price of the new asset received.

Example:

A company wants to exchange its old car with a book value of Rp 135,000,000 from the basic price of Rp 150,000,000. With the depreciable cost being Rp. 15,000,000 and the fair market price being Rp. 160,000,000, the company must pay IDR 10,000,000 in cash to be exchanged for a new car at a fair market price of IDR 170,000,000.

How it is stated in the journal entry:

The Old Car’s Fair Market Price  160,000,000
The Old Car’s Book Value 135,000,000
Unrealized Gain 25,000,000
The New Car’s Fair Market Price 170,000,000
Cash Paid 10,000,000
Book Value 145,000,000

 

E. Through Donations

An asset acquired through a donation is also called a non-reciprocal transfer (or a one-way transfer). Depreciation of a donated fixed asset is calculated in the same way as other types of fixed assets.

Example:

A company receives a land with the acquisition cost of Rp. 80,000,000, but the fair market price of the land is Rp. 110,000,000.

How it is stated in the journal entry:

Land Fair Market Price 110,000,000
Land Acquisition Cost 80,000,000
Profit 30,000,000

 

F. Manufactured Assets

Due to certain considerations, companies often make their own fixed assets, such as buildings, appliances, and furniture. Companies must allocate all costs including costs of materials, labor, and overhead. Overhead costs usually include electricity, insurance, equipment, and factory supervisors.

To make it easier for you to record the acquisition, sale, and depreciation of your fixed assets, consider using an automated accounting solution. Complete accounting software allows you to calculate, record, track, and forecast all transactions related to your assets instantly, accurately, and efficiently.

Conclusion

After knowing the definition, examples, characteristics, journal entries and acquisition methods of fixed assets, hopefully you can now better manage all the fixed assets in your company. Robust accounting software will make it easier for you in this regard, allowing you to save a lot of time, minimize human errors, and maintain accurate asset records.

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