Gross fixed assets

Gross fixed assets
See also

Gross fixed assets, also known as historical cost of an asset or gross book value is a term used in accounting and refers to the amount of money the company had to pay in order to possess all of the fixed assets. The calculation does not consider depreciation or consumption during the fixed asset’s lifespan. Gross fixed asset is often used in different formulas, which help to calculate profitability ratio of a company. Such ratio helps the management to assess if the business is able to generate profit corresponding to its income, expenses, assets from the balance sheet and owner’s equity over a period of time[1].

Fixed assets[edit]

Fixed assets are permanent objects which last for more than one accounting period and a company is not willing to sell them in the nearest future. This position in the balance sheet, in the section of non-current assets, is also called “Property, plant and equipment” (PP&E). They are mainly used in the process of storage, delivery or production. As a firm might have multiple of such items, the accounting law describes fixed assets as objects which purchase value passes a particular level. Any other way, the purchased object can be recognized as an expense. The amount of fixed assets is presented on the balance sheet as an acquire amount subtracted by the value of cumulated depreciation. The main difference between an object, which has to be capitalized or expensed is its lifespan assumption and value. If the purchased, permanent item, is not going to last one accounting period or its value is lower than a certain threshold, it must be considered as an expense in the year of acquisition. Any object which will be used longer than one accounting period and its value is bigger than the level established by the accounting law must be depreciated. Fixed assets are divided into subcategories, such as[2]:

  • Buildings
  • Fixture and fittings
  • Intangible assets
  • Land
  • Leasehold improvements
  • Machinery
  • Vehicles

Buildings, fixture and fittings, machinery and vehicles are very similar in terms of depreciation. All of them undergo yearly loss of value throughout their lifespan (from a few years in case of fixture and fittings, up to several dozens in case of buildings). As intangible assets are non-physical assets, which represent entity’s legal interest, they undergo the process of amortization, which is the same as process of depreciation, but it refers to intangible assets only. Land is the only type of fixed assets, which is not depreciated due to its unlimited useful life[3].

Leasehold improvements[edit]

A leasehold improvement is a redecoration implemented in the rental property in order to adjust it to the particular needs of a tenant. Such improvements include painting, changing the flooring, removing or adding new walls, customizing the lighting etc. The changes may be covered by the landlord, in order to increase the potential of the real estate or by the tenant. In most cases, the useful economic life of the improvements is estimated at 5-10 years[4].

Footnotes[edit]

  1. R. H. Peterson 2002,Accounting for Fixed Assets Second Edition, John Wiley&Sons,Inc., New York, p. 13
  2. N. Faussett 2013, Fixed Asset Management: What You Need To Know, SAGE, p. 4
  3. N. Faussett 2013, Fixed Asset Management: What You Need To Know, SAGE, p. 4.
  4. T. Goodspeed 2014, Accounting for Leasehold Improvements, Seattle, p. 6

References[edit]

Author: Justyna Piekorz