A fixed asset, a long-term resource owned by a company, is a strategic tool used to generate income. These assets, critical components of a company's balance sheet, represent significant investments and play a pivotal role in the company's financial health.
These assets are not intended for resale during regular business operations but are used in production, supply chain, or administrative functions. For example, a cheese manufacturer might purchase packing machinery to use over five years. This machinery is considered a fixed asset, providing long-term value to the company.
The cost of the machinery includes its purchase price, legal fees, installation costs, and any other expenses necessary to make it operational. When recorded on the balance sheet, it reflects the total initial cost. Over time, the machinery will depreciate, reducing its book value. This depreciation accounts for the wear and tear from regular use, ensuring the fixed asset is accurately represented on financial statements.
