Net fixed assets represent a company’s historical asset costs, less accumulated depreciation. The historical cost of assets represents the actual cost paid for by the company. Companies record this information to reflect the amount of fixed assets owned and used to produce profits. Accumulated depreciation is the expense that represents the annual use of each fixed asset. Rather than reducing the historical cost of an asset, accumulated depreciation is a contra-account used for this purpose.
In balance sheet terms, fixed assets are plant, property and equipment. Plant and equipment are the two groups with related depreciation; property may or may not have depreciation. Land owned by a company will not depreciate, therefore, the historical cost should remain the same. The only change for the land will come from mark-to-market accounting. Buildings or facilities in the property category will most certainly have deprecation, resulting in a net figure for this asset classification.
Companies can use a variety of different depreciation methods to determine net fixed assets. Among the most common deprecation methods are straight line and double declining balance. The straight line calculation is historical cost, less salvage value divided by useful life. Double declining methods take a predetermined use percentage and multiple it by the historical cost. Subsequent years reduce the cost by the previous years’ depreciation and calculate a new figure for the current year.
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Accountants use a basic journal entry to record calculated depreciation. The entry will debit depreciation expense and credit accumulated depreciation. This provides the information necessary for calculating net fixed assets. Each account in the journal entry resides on a separate line on the balance sheet. Accountants will need to produce the net fixed assets figure by taking the information directly from the balance sheet and calculating the information separately.
Stakeholders often have an interest in a company’s net fixed assets because the figure represents a true value for a company. The balance sheet contains items that help stakeholders determine the economic wealth of a business. A basic calculation for economic wealth is total assets, less total liabilities. Net fixed assets will decrease this value as the assets age and start to become worthless. When fixed assets reach their salvage value, companies will need to replace them or run the risk of increased maintenance costs.
Depreciation expense also lowers a company’s tax liability. Each month, the recorded depreciation reduces net income. Companies receive this benefit only from the depreciation associated with fixed assets.