What are fixed assets?

What makes something a fixed asset?

Two tests. It will be used in the business for more than a year, and it cost enough to be worth tracking. A £6,000 van passes both. A £15 hammer passes the first but not the second, and goes straight through as a cost. Stock bought to sell on fails the first test, however expensive, because it is meant to leave.

The threshold for 'enough' is your own policy, applied consistently. Many small businesses treat anything under a few hundred pounds as a cost regardless of how long it lasts, because tracking a kettle on a fixed asset register is effort with no benefit.

Fixed assets are recorded at what they cost, including delivery and installation, and then depreciated over their useful life. The balance sheet shows the cost, the depreciation charged to date and the net book value. A fixed asset register lists each one individually, with its date, cost and depreciation, which is what your accountant asks for at year end.

What does it look like in practice?

A café opening its second site buys an espresso machine for £4,500, tables and chairs for £1,200, a laptop for the till for £600, and its first week's milk and beans for £360.

The machine, furniture and laptop are fixed assets, £6,300 in total, and go on the balance sheet. The milk and beans are stock, become cost of sales as they are used, and never touch the fixed asset register.

After a year the machine has been depreciated by £900, the furniture by £240 and the laptop by £200, so fixed assets show at £6,300 cost less £1,340 depreciation, a net book value of £4,960. The £1,340 has gone through the profit and loss as depreciation, £112 a month, rather than £6,300 landing in the month of opening.

How are fixed assets different from current assets?

Current assets are things that will turn into cash within a year: stock, debtors, and cash itself. Fixed assets are the things the business keeps in order to trade. The distinction matters because current assets against current liabilities tell you whether you can pay your bills, and fixed assets tell you what the business has invested in that is not for sale.