Updated July 10, 2023
Definition of Net Fixed Assets
Net fixed assets refer to the total cost of fixed assets (land, building, furniture, plant & machinery, etc.) purchased by the business entity, deducted by the amount of depreciation accumulated on such assets from the date of purchase till the day of calculation of the value of net fixed assets.
Explanation
It represents the net book value of fixed assets and is calculated by deducting the depreciation that has been charged on the given fixed assets since the date of purchase from the total cost of such fixed asset purchased; for example, machinery was purchased on 1st April 2018 for $5,000 whose useful life is ten years. We must calculate the net Fixed Assets value as of 31st March 2020. In this case, the ten-year depreciation is $500 ($5,000/10). Therefore, in the first year, the depreciation charged is $500, and in the second year, the depreciation charged is again $500. Therefore total depreciation till 31st March 2020 is $1,000. So the asset’s net book value as of 31st March 2020 is $4,000 ($5,000 – $1,000).
The Formula for Net Fixed Assets
The formula for the net fixed assets is as follows:
Where,
Gross Fixed Assets refer to the total cost of fixed assets, including all expenses incurred while putting the fixed assets to use, including purchase, installation, transportation, etc. Also, if any capital improvements are made, then that cost shall also be included.
And Accumulated depreciation refers to the cumulative depreciation charged on the fixed asset until the given time.
Example of Net Fixed Assets
Suppose Mr. John started a mobile company in which he purchased fixed assets on 1st April 2017.
|
Sr.No. |
Name | Purchase cost ($) | Transportation Cost($) | Installation Cost($) | Total($) |
Useful life(years) |
| 1 | Office Building | 25,000 | 200 | 100 | 25,300 | 20 |
| 2 | Furniture | 10,000 | 50 | 200 | 10,250 | 10 |
| 3 | Plant & Machinery | 5,000 | 50 | 0 | 5,050 | 10 |
| 4 | Computer | 2,500 | 100 | 50 | 2,650 | 6 |
| TOTAL | 43,250 |
We need to calculate the Net Fixed Asset value as of 31st March 2020.
Solution:
Calculation of Accumulated Depreciation
| Sr.No. | Name | Total($) (A) | Useful life(years) (B) | Depreciation for FY 2017-18 (A/B) (C) | Depreciation for 2018-19 (A/B) (D) | Depreciation for 2019-20 (A/B) (E) | Total Accumulated Depreciation as of 31st March 2020 (C+D+E) |
| 1 | Office Building | 25,300 | 20 | 1265 | 1,265 | 1,265 | 3,795 |
| 2 | Furniture | 10,250 | 10 | 1025 | 1,025 | 1,025 | 3,075 |
| 3 | Plant & Machinery | 5,050 | 10 | 505 | 505 | 505 | 1,515 |
| 4 | Computer | 2,650 | 6 | 441.7 | 441.7 | 441.7 | 1,325 |
| TOTAL | 43,250 | 9,710 |
| S.No. | Name | Total($) (A) | Total Accumulated Depreciation as of 31st March 2020 (B) | Net fixed assets as of 31st March 2020 (A-B) |
| 1 | Office Building | 25,300 | 3,795 | 21,505 |
| 2 | Furniture | 10,250 | 3,075 | 7,175 |
| 3 | Plant & Machinery | 5,050 | 1,515 | 3,535 |
| 4 | Computer | 2,650 | 1,325 | 1,325 |
| Total | 43,250 | 9,710 | 33,540 |
Therefore, the total value of net fixed assets as of 31st March 2020 is $33,540.
Components of Net Fixed Assets
Different components are mentioned below:
- Fixed Assets: Fixed assets are the long-term capital assets the business owns and are not available for sale like the inventory. These assets have provided economic benefits to the business for several years. They can be tangible assets such as office equipment, plant &machinery, furniture, land, building, etc., and intangible assets like patents, copyright, goodwill, and trademark.
- Accumulated depreciation: Accumulated depreciation refers to the depreciation that has been charged on the fixed asset till the current date of use. Each year, the depreciation is to be charged (booked as an expense in the income statement) on every fixed asset, and that amount charged is added to the accumulated depreciation.
- Cost of fixed asset: The cost of a fixed asset includes the Purchase cost, transportation & installation cost, import duties (in case of imports), and other Taxes and costs that are directly related to the fixed asset, i.e., cost incurred to bring the fixed asset in a working condition.
- Capital improvements: Capital Improvements are the additions to the fixed asset that increases the efficiency and capacity of the fixed asset, thereby bringing more operational efficiency. The benefit of these capital improvements will be there for several years, so the cost incurred on such improvements is considered part of fixed assets, and the depreciation is to be charged on the same.
Analysis
The net fixed assets values show the value of a fixed asset after depreciation. This shows how much the asset is used and depreciated until the given time. For more analysis, the Net fixed asset ratio is calculated, whose formula is Net fixed assets divided by the total cost of fixed assets (it includes capital improvements also). For example, the total cost of a fixed asset is $1,000, and cumulative depreciation is $200, implying the value of the net fixed asset is $800 ($1,000-$200). Therefore, the net fixed assets ratio is 0.80 ($800/$1,000). This implies that the value of the assets in the books is still 80% and is only 20% of the total cost (including capital improvements). This indicates that the assets are new and have several years remaining.
Advantages
Some of the advantages are as follows:
- The net fixed asset of the company shows the actual value of the fixed asset position after taking depreciation into consideration, which thereby helps the users, including investors, lenders, suppliers, etc., in assessing the financial health of the company
- The analysis is more important in capital-intensive industries as the investments in these industries are huge if the cash outflows are more in such industries. Also, the position can be good because purchasing fixed assets requires huge funds.
Disadvantages
Some of the disadvantages are as follows:
- Often the assets are fully depreciated, resulting in the asset value in the books becoming zero or very less. However, the asset is still usable and can provide benefits for further years. A so-net fixed asset may show an asset to be worthless, but in reality, the asset is still worthy.
- Even the new asset, whose life is assumed to be one year, gets fully depreciated in a year only, making the book value of the new asset nil in a single accounting year, leading to a wrong interpretation in users’ minds about the presence of asset.
Conclusion
Thus, Net fixed assets are the Gross value of fixed assets less accumulated depreciation. The figure for net fixed assets is reported on the company’s balance sheet. Therefore, it is useful for the users to evaluate and assessment of the financial position of the company.
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This is a guide to Net Fixed Assets. Here we also discuss the definition and components along with advantages and disadvantages. You may also have a look at the following articles to learn more –
