Any tangible item not consumed within one accounting cycle (typically a year) and providing long term utility is referred to as a Fixed Asset. Traditional images include manufacturing equipment, tools, transportation vehicles, buildings and utility related systems (sewage systems, power grids, power plants and dams). In accounting, these assets are recorded to the balance sheet as ‘Fixed Assets’.
Fixed assets are large ticket purchases that have an extended utilization with life. They are not typically sold in the due course of business and as such they are allocated via depreciation to the income statement.
The Internal Revenue Service sets the depreciation allowance based on the Code as promulgated by Congress. The most commonly referenced section is 179. This is a form of accelerated depreciation allowing the small business owner the opportunity to take a large expense deduction and reduce their tax obligation immediately.
Reading a balance sheet is instrumental in understanding the business’s financial position. This particular financial report is a snapshot of a moment in time. It can change dramatically in a minute so understanding the perspective of the report and its respective sections will help you to be better informed.