A company can own many types of assets, and it’s important to understand the difference between different categories. If you want to know more about fixed assets and how they work, this guide is for you.

We’ll cover:

  • What fixed assets are, and why they’re important
  • What items count as fixed assets
  • How depreciation works on fixed assets
  • What non-depreciable fixed assets are
  • The formula for calculating fixed assets

What are fixed assets, and why are they important?

A fixed asset is a valuable item that a company has bought to use for the long term, meaning more than a year.

Fixed assets are important to companies since they help the business generate revenue (money made from sales) and also attract investors if needed. Investors tend to look closely at your fixed assets when determining if your company is a good investment opportunity. For example, by determining how efficiently your fixed assets contribute to making sales. 

The more effectively you use your fixed assets, the better your business will run and the more likely you are to attract investors. It’s important to understand what is and isn’t a fixed asset to determine these things.

What counts as fixed assets?

Fixed assets are noncurrent assets, meaning they have a useful life of more than one year and can be either tangible and intangible items. 

Tangible assets are physical operational resources that are often essential for small businesses. Intangible assets are nonphysical resources that still provide value to your company.

Examples of tangible fixed assets include:

  • Computer hardware
  • Mobile phones
  • Furniture (filing cabinets, desks, sofas, chairs etc.)
  • Fixtures (sinks, lighting, faucets etc.)
  • Tools
  • Machinery
  • Equipment 
  • Vehicles (cars, vans, lorries, etc.)
  • Buildings and land
  • Office equipment (photocopiers, fax machines, printers, etc.)
  • Warehouses

Intangible fixed assets include:

  • Patents, copyrights and trademarks (learn more about them here)
  • Stock and bond investments
  • Your brand name
  • Unique processes

Another important thing that determines if an asset is fixed is that it’s not liquid, meaning you can’t easily convert it into cash. An example of a liquid asset would be the cash in your business current account or the products you sell. 

Fixed assets aren’t meant to be sold while they’re still useful. Instead, their purpose is to help produce your goods or services. 

How does depreciation work with fixed assets?

Since most businesses buy fixed assets because they need them for their daily operations, these items have value for as long as they’re useful. Still, the value of these assets decreases every year you use them. The decrease in value is called depreciation. 

Fixed assets may still have value at the end of their useful life, so you’d calculate their depreciation by subtracting their resale value from the original price you paid. 

Depreciation is useful in business because it gives a relatively accurate picture of how well the asset contributes to the business. Fixed assets typically provide the most value when you first buy them but suffer from wear and tear as they age. Even if they don’t, other factors may make them less valuable, such as newer and better models being released. Either way, you eventually need to replace them.

Businesses also benefit from depreciation since it allows them to account for the cost of an asset over two or more years. This way, you get a more realistic overview of the business’ overall performance. Conversely, not accounting for depreciation could throw off your profit calculations. 

You can depreciate fixed assets for both tax and accounting purposes, for example, by taking a tax deduction for the asset’s cost to reduce your taxable income. This way, depreciation helps you earn revenue from an asset while claiming a portion of the cost as a tax reduction every year you use it. 

For intangible (non-physical) assets, the process is known as amortisation. You can learn more about how depreciation and amortisation work in this guide.

What are non-depreciable fixed assets?

Some fixed assets can’t be depreciated, such as land. This is because land tends to keep its value over time and may even become more valuable after a few years. You might assume that buildings and property are the same, but buildings can also be depreciated if they’re owned and not leased.

Other assets that can’t be depreciated are collectables like art and antiques since they’re also expected to retain their value over time. But it’s unusual for businesses to have these assets.

How do taxes work on fixed assets?

This part might be confusing, but we’ll try to break it up for you. While HMRC states that depreciation isn’t an allowable expense for tax, it doesn’t mean you don’t get any tax relief on your depreciated assets.

Instead, you have a so-called ‘capital allowance’, a tax allowance for capital expenditures (fixed assets are also called capital assets). As such, you can claim the expense against your taxable profit. Find out more about how capital allowances work here.

Manage finances easily with Countingup

Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.