So What Are Net Fixed Assets?
In this post, we’ll talk about net fixed assets and how they fit into the balance sheet. In the last few sections, we’ve discussed what an asset is and walked through examples of current assets so make sure to check out these posts if you need a refresher.
Unlike current assets, fixed assets are assets that we don’t think will be turned into cash within the next year. To help explain this topic, we can walk through a couple of examples of fixed assets.
Plant, Property and Equipment (also called PP&E): This category can include things such as machinery, equipment, office buildings, warehouses, furniture, computers, land and a number of other items. Since we don’t expect to turn these items into cash within the next year, they fall in the category of fixed assets. One thing to note is the value of each of the items is recorded on the balance sheet at cost (meaning the value that you bought it at).
Accumulated Depreciation: Depreciation is a tricky topic so we’ll walk through an example to try to demonstrate what it is. Say that you bought a brand new truck for your business and are able to drive it off the lot for $30,000. Since you paid $30,000 for the truck, that value would be added to the Plant, Property and Equipment section of the balance sheet. Now let’s say that you’ve owned it for one year and put 20,000 miles on the truck. When you look online to see what one year old trucks with 20,000 miles are selling for, you see that the truck is now only worth $27,500. Since the truck is now worth $2500 less, we need to account for that on the balance sheet. Remember that the values that we recorded in the Plant, Property and Equipment tab have to be valued at cost so we have to leave the $30,000 price of the truck in the PP&E category. To account for the $2500 loss in value of the truck, we instead add the $2500 to the accumulated depreciation section. This will subtract off the $2500 from the original $30,000 price, which will give us the correct current value of the truck at $27,500. From the example above, we can see that depreciation is really just the value lost from a fixed asset due to it wearing out as you use it over time. Accumulated depreciation is the sum of all depreciation charges since purchasing the fixed assets.
Net Fixed Assets: So to get how much our total assets are worth, all we need to do is subtract off the Accumulated Depreciation from the Plant, Property and Equipment. The equation for it looks like this:
Net Fixed Assets = Plant, Property and Equipment – Accumulated Depreciation
How About Those Other Assets
Other assets are items that don’t fit into either the current asset or fixed assets category. These are usually intangible assets, meaning that they are not physical things that the company owns but still have value. Examples of intangible items that have value could include patents, brands, copyrights or other things of that nature. The way accountants value these types of things are out of my league so we’ll just leave it at that.
Adding it All Together – Total Assets
Now we’ve calculated our total current assets, net fixed assets and other assets, we can sum them all up to see what the total assets are.
Total Assets = Total Current Assets + Net Fixed Assets + Other Assets
Since we’ve now gone through the whole left side of the balance sheet, in the next post we’ll start going through the right side of the balance sheet which starts with liabilities.
Key Takeaway: Net fixed assets are things we own that we don’t expect to turn into cash within the next year. Depreciation is really just an accounting way to show that a fixed asset loses value over time as it wears out from use. Total assets are calculated by adding up the current assets, net fixed assets and other assets.
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