If you have a business, then you must have heard about words like assets, liabilities, fixed assets, and depreciable assets, quite often. These terms used in economics may be perplexing for some people who have not been in the game for a long time.
First of all, assets and liabilities are both goods and commodities that help a business in its functions. Assets are owned by the company, whereas liabilities are not owned by the firm but borrowed or owed to a third party like a business partner or vendor.
In assets, there are various types. Many factors help in categorizing an asset in one form or the other. The tangible assets, e.g., are assets that can be seen and have physical use; things like a company's premises, furniture, and so on are tangible assets.
On the other hand, intangible assets are assets that cannot be seen or felt but form an essential part of the business. The goodwill or brand name of a firm, for example, is its intangible asset.
There are other ways as well to categorize assets. They are, namely, fixed assets and depreciable assets. This categorization of assets is used to indicate how they can affect the business in the long term due to their intrinsic nature of either increasing or decreasing in value.
We shall have a look at each in detail in the following passages.
A fixed asset is an asset that serves a high productive purpose in a firm. The term 'productive' here also refers to other objectives that contribute to the firm's productivity. E.g., a land that has the firm's premise is a fixed asset. It is directly helpful for the firm by sustaining a productive area. Moreover, it also helps with other functions, as training and support work.
The fixed assets may be tangible or intangible. The land is a tangible asset. An example of the intangible fixed asset is the patent a company has; as it is on the virtues of the patent, it can manufacture the products, not an asset existing in physicality.
The infringement of the patent by someone else can lead to legal actions. This action is because the company loses its sole right in manufacturing under the patent.
The fixed asset does not imply the permanent nature of the asset either. Things like vehicles, laptops, and projectors are portable and meant to be moved around; nevertheless, they help the firm increase its productivity either directly or indirectly.
The term fixed asset is used in contrast with the current asset. Cash, inventory, and goods receivable are classified as current assets. Whereas land, infrastructure, equipment, etc. are regarded as fixed assets.
Depreciable assets are a part of the fixed assets of a company. Every asset either has an appreciating or depreciating value. There are very few company assets that have appreciating value; things like the land and goodwill are amongst them.
Depreciation is one of the most significant demerits of buying any tangible property. Various things contribute to the depreciation of an asset. Things like the launch of newer technology, disrepair, or obsolescence of the equipment can lead to depreciation. Other examples like general wear and tear due to the use and amortization of intellectual property are common reasons for the depreciation of properties.
The fixed assets have a useful life for more than one reporting; i.e., usually one year, the firm should take the total expected life or life of usability of the product into account.
A company can suffer from a significant loss due to the depreciation of some of its assets. Depreciated property means a low or no resale value for the property. Things like disrepair or obsolescence make a firm spend a lot on repair or replacement or upgrade the equipment.
For instance, a set of computers in a firm is too outdated to carry out new tasks like 3D printing, and the client demands the company to conform to the change. In this case, making a complete changeover can make the company make substantial investments, with virtually no value for the outdated computer sets, in return.
Depreciable assets are financially detrimental to a company; however, appreciating or other fixed assets may not be economically beneficial. A firm usually will not sell them to continue with their use.
These were the differences between assets and liabilities and fixed and depreciable assets every company has. Taking these things into consideration can help the firm avoid any possible loss and gain better profit.