When it comes to planning for retirement, you should take a look at your fixed assets to determine where you will spend your money over the course of your lifetime. Your fixed assets can consist of many different types of property, including stocks, bonds, mutual funds, real estate, franchises, collectibles, antiques, art collections, and more. While you can make investments in the equity market or the value of your future accounts and securities, fixed assets allow you to control your wealth for the duration of your retirement.
A fixed asset isn’t an intangible piece of property like inventory or accounts receivable; rather it is actually a physical, pre-existing asset. If you purchased your home four years ago with a mortgage and have held on to it, then your fixed assets include your mortgage and your original house. A variable asset, on the other hand, can be anything that has a current value (like stock or CD’s) or is worth more in the future (like gold or bonds).
As most businesses are generally the accumulation of raw materials and labor over time, the accounting details of a business can be broken down into three categories: tangible assets, non-tangible assets, and intangibles. A tangible asset is something that you own, such as a home, boat, or car. How to determine if an asset has a future value will depend upon its usefulness to a business and how much it can be sold for when the time comes. Non-tangible assets, on the other hand, are non-physical items like trademarks, technology, information, and licenses.
If you don’t want to use the word “fixed,” you could instead choose “financial assets.” These are subject to the same accounting principles as fixed assets, but there is one major difference: financial liabilities are only amenable to a limited scope of events. This means that they cannot be derived from cash flows, only from net trade and/or sales. For any fixed asset, on the other hand, it can be derived from both positive and negative trades.
The way the business accounts for its fixed assets is called depreciation. By deducting the cost of producing the asset – including its production costs – from the asset’s sale price, the value of the asset can be calculated. There are several different methods of depreciation, but they all pretty much work the same way. Over time, the asset’s market price will decrease. The company’s financial statement will reflect the depreciation and an adjustment to the gross and net income should be made to account for the depreciation allowance.
The balance sheet will show one year of accounting results for each category of fixed assets: current assets, long term capital assets, and intangibles. Long term assets represent those required for operation through the next five years. They include inventory, accounts receivable, accounts payable, and payroll. The current assets category reflects the current financial resources used to produce the current inventory as well as current operations related to production, selling, and financing.
The accounting for current assets is usually the first to be presented in the annual financial statements because it represents the most immediate part of the company’s costs. One can estimate future costs by estimating the present value of future capitalized costs less any cash payments that have not yet been received. The difference between the present value of future capitalized costs and the cost less amount represents the charge to capital. A company can depreciate its fixed assets for tax purposes by spreading the cost of production over a period of time. Depreciation is generally charged at the end of one year, but some corporations choose to apply it to the end of the business year instead.
The accounting of intangibles is a little more complex. The measurement of a business’s intangible assets is known as a useful life or Lifestyle. A company’s useful lives are those periods in which the assets do not change hands. These include the years during which the assets are owned by the corporation and the years in which they are owned by the public. Many companies use book depreciation instead of cash-basis depreciation in their accounting practices, because using cash-basis depreciation results in a more accurate picture of the book value of their fixed assets.