Fixed assets

Fixed assets are the foundation upon which any project is built, whether small or large, and they are important long-term assets for the company. These assets include production equipment, buildings, and land specific to the project.

It is worth noting that these assets are subject to depreciation, which can be divided into several types and is calculated based on the expected period of use of the asset and its total value.

These fixed assets can be purchased or leased, and the choice depends on several factors such as the cost of the asset, the company’s specific needs, and the overall costs of acquiring the asset.

In general, fixed assets are an important part of any project, and it is necessary to determine the optimal plan for acquiring and maintaining them.

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We will explain this in detail through several points, which are:

  1. What are fixed assets?
  2. Types of fixed assets
  3. Examples of fixed assets
  4. The difference between fixed assets and current assets
  5. Depreciation of fixed assets
  6. How to improve fixed asset accounting in an organization


What are fixed assets?

Fixed assets are long-term tangible assets owned by organizations and used in the production of goods or services. They are an essential part of the organization’s fixed capital. Fixed assets are characterized by generating long-term profits for the organization and are used for an extended period. They include buildings, machinery, equipment, vehicles, land, and other fixed properties.

The importance of fixed assets can be summarized in the following points:

  1. Fixed assets are an essential part of the organization’s fixed capital and contribute to generating long-term profits.
  2. Fixed assets are used for an extended period and are a vital source of growth and expansion for any organization.
  3. Fixed assets can be used to determine the organization’s efficiency in generating future sales.
  4. Fixed assets help strengthen the organization and sustain it in the long run.
  5. Fixed assets improve productivity and reduce costs as they can be used to increase the efficiency of the production process.
  6. Fixed assets are an important source of external financing, as they can be used as collateral to obtain loans and financing from banks.
  7. Fixed assets are a source of fair value for the organization and help determine its value in case of sale or acquisition.

Types of fixed assets:

1- Buildings: Including offices, factories, warehouses, shops, and others.

2- Machinery and equipment: Including machinery used in production processes, transportation equipment, heavy equipment, and others.

3- Land: Including land owned by the entity and used in producing goods or services.

4- Vehicles: Including cars, buses, trucks, planes, boats, and others.

5- Furniture and furnishings: Including tables, chairs, shelves, and other office supplies.

6- Patents and trademarks: Including intellectual property rights owned by the entity, such as patents, trademarks, copyrights, and designs.

7- Computer programs and systems: Including programs and computer systems used by the entity in managing its operations.

8- Others: Including any other fixed assets possessed by the entity and used in producing goods or services, such as medical equipment, construction equipment, and others.

The difference between fixed assets and current assets is as follows:

itemFixed AssetsCurrent Assets
DescriptionAssets used for more than one yearAssets used for less than one year
NatureIncludes tangible assets such as buildings, machinery, and equipmentIncludes financial assets such as cash, accounts receivable, and accrued revenues
PurposeUsed to generate long-term profits and improve productivityUsed to meet daily company needs, such as salaries and expenses
ValuationEvaluated by book value, exclusion value, and continuous exclusionEvaluated by book value only
Susceptibility to FormationSusceptible to wear and tear and formation over the long termDoes not undergo wear and tear in the same way and does not form over the long term
ExamplesBuildings, machinery, vehicles, and landCash, accounts receivable, accrued revenues, and securities

– A current asset is an asset that can be easily disposed of or planned to be sold within 12 months, making it easy to convert into cash.

– A fixed asset, on the other hand, is an asset that is not planned to be sold and continues for more than 12 months, making it difficult to convert into cash.

– Financing and purchasing current assets is easy, but investing in fixed assets is difficult because it requires long-term funds.

Depreciation of fixed assets

Fixed assets such as buildings, machinery, and equipment are subject to use and deterioration over time, which leads to a decrease in their value. Therefore, the depreciation of these assets is calculated, except for land, which is not affected by value reduction.

Fixed assets are depreciated for several reasons. The first reason is their use in production and their susceptibility to wear and tear and damage. The second reason is the decrease in the value of assets over time. It is not possible to buy equipment today and expect its value to remain constant after use.

Thus, the value of depreciation is charged to the profit and loss account in each financial period, and the value of fixed assets is reduced by the amount of depreciation charged on them.

Depreciation is an important factor in determining the net value of fixed assets and in evaluating them in the case of sale or acquisition. It is also considered an expense that is charged to the company in each financial period.

How can fixed asset depreciation be calculated?

There are three main methods for calculating depreciation of fixed assets, which are:

  1. Straight-Line Depreciation:

This is the most commonly used and simplest method, where the value of the asset is divided by the expected period of use, and the same amount is allocated as an annual expense for depreciation. For example, if the value of the asset is $10,000 and its expected useful life is 10 years, then $1,000 per year is allocated as depreciation expense.

  1. Accelerated Depreciation:

This method relies on allocating a higher percentage of the asset value as depreciation expense in the early years of use, due to the fact that the value of the asset decreases more quickly in the early years. The depreciation percentage is reduced in subsequent years. Examples of accelerated depreciation methods include the Double Declining Balance method and the Sum-of-the-Years’ Digits method.

  1. Units of Production Depreciation:

This method is based on dividing the value of the asset by the expected units of production during the asset’s useful life, and allocating the same amount as depreciation expense for each unit produced. The annual depreciation expense is then determined based on the number of units produced each year. For example, if the value of the asset is $10,000 and 1,000 production units are expected, then $10 is allocated as depreciation expense for each unit produced.

The most suitable and appropriate method is selected based on the type of asset, expected useful life, and financial goals of the company.

How to improve fixed asset accounting for a company?

Improving fixed asset accounting for a company requires adherence to accurate and effective procedures. The process can be divided into five main stages:

  1. Identifying all fixed assets: All fixed assets owned by the company, whether tangible or intangible, must be identified and recorded in the accounting records.
  2. Determining the value of fixed assets: Fixed assets are evaluated based on their book or market value, and these values must be updated regularly to improve the accuracy of financial reports.
  3. Determining the assumed useful life: The assumed useful life of fixed assets must be determined and applied to depreciation accounts.
  4. Calculating depreciation: Depreciation must be calculated regularly and recorded in the accounting records. Any of the three main methods of depreciation can be used: straight-line depreciation, accelerated depreciation, and units of production depreciation.
  5. Verification and review: Fixed asset records must be reviewed regularly to ensure accuracy and completeness, and updated regularly. Periodic reviews of fixed assets must also be performed to ensure that no losses or damage to assets occur.

Here are some tips that can be followed to improve fixed asset accounting:

– Regularly update the values of fixed assets to provide greater accuracy in financial reports.

– Use specialized computer programs to manage fixed assets and facilitate management and control.

– Train and educate employees responsible for managing fixed assets on the correct procedures and methodologies.

– Manage fixed assets centrally and define responsibilities and authorities for relevant employees.

– Develop a plan to replace old fixed assets with new ones and provide necessary financing to maintain productivity and avoid high maintenance costs.”

Based on what has been mentioned in this article,

it can be said that managing fixed assets is vital for any establishment seeking to achieve success and sustainability in business.

Fixed assets constitute a fundamental part of a company’s net worth and have a significant impact on its ability to achieve sustainable profits and growth.

Therefore, establishments must work to improve fixed asset management and apply the correct procedures and methodologies to ensure the achievement of desired goals.

When implementing a fixed asset management improvement process correctly, the establishment will be able to achieve high efficiency in productivity, reduce costs, and increase profits, ultimately leading to sustainable success and growth in business.

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