What are Fixed Assets?

as·set

/ˈaˌset/

noun

a useful or valuable thing, person, or quality.

"quick reflexes were his chief asset"

Your company needs assets to make money.

Tangible assets include land, vehicles, and machinery. Intangible assets are things like customer relationships, goodwill, and trademarks.

Fixed assets are tangible or intangible assets held by a company over the long haul to generate income. A good rule of thumb is anything valued over $2,000 that will be used over the course of a few years is considered a fixed asset.

Tracking Fixed Assets

One of the most common issues I run into when onboarding a new client is how they track fixed assets. Many business owners simply write off the entirety of their asset purchases as a business expense the same year that they buy them. Others don't understand the concept of depreciation and how it important it is to create a depreciation schedule. Let's dive into a few of these issues!

1. Determining what qualifies as a fixed asset. This can be tricky. For example, you may spend $3,000 on a marketing package that will help you generate revenue in the future. Or you might pay a monthly rent bill that is over $2K. Neither of these are considered fixed assets since they provide an immediate return on investment and are "consumed" within the accounting period rather than providing value over the course of several years. Remember, a good rule of thumb is anything valued over $2,000 that will be used over the course of a few years is considered a fixed asset. If you are unsure if your expense qualifies as a fixed asset, drop us a comment below and we will be happy to help you out!

2. Creating a fixed asset account. It's imperative that you create the right type of account in your Chart of Accounts when recording your fixed assets. In QuickBooks Online, navigate to your Chart of Accounts and click on the green "New" button on the top right. A pop up window will appear where you can name your account (eg. Vehicles, Machinery, Land), number the account (ie. 300s), and choose the account type (ie. Fixed Assets). These purchases will now show up on your balance sheet increasing the equity of your company.

3. Depreciating Your fixed asset. Since your fixed asset will lose value over the course of time, it's imperative to set up a depreciation schedule. These amounts will be deducted from value of the asset and recorded as an expense on your tax returns. It's important to consult your accountant or bookkeeper when setting up a depreciation schedule to ensure compliance with accounting standards and tax regulations.

Accurate tracking and accounting of your fixed assets are essential not only for IRS compliance but also for robust reporting. Your Balance Sheet, a pivotal financial document, provides a snapshot of your company's financial health. If your fixed assets aren't accurately recorded, it could lead to significant errors in calculating your company's equity. Such inaccuracies can pose challenges when engaging with investors, creditors, and stakeholders. Therefore, ensuring precise reporting by diligently tracking fixed assets is paramount for your business's credibility and success.