The Things Your Business Keeps, Not the Things It Uses Up
Picture two purchases a small bakery makes in the same week. It buys a £40 sack of flour and a £4,000 commercial oven. Both leave the bank account. Both are bought to make money. Yet your accounts treat them completely differently, and understanding why is the heart of what a fixed asset is.
The flour gets used up almost at once. It becomes bread, the bread gets sold, and the cost belongs to this month. The oven is different. It will still be baking in five years, earning money the whole time. Counting its full £4,000 against this month alone would make the month look terrible and unfairly flatter every month after it.
A fixed asset is the oven, not the flour. It is something your business owns and keeps to use over the long term, rather than something it sells or consumes quickly. This guide explains what counts, how fixed assets differ from current assets, the difference between tangible and intangible ones, how they sit on your balance sheet, and the simple record most small businesses never get round to keeping.
Defining Fixed Assets
A fixed asset is an item a business owns and expects to use for more than one year to help it trade. The formal name you will see in a set of accounts is non-current assets, which means exactly the same thing. They are the long-lasting tools of the business rather than the stock that flows through it.
Three features tend to define a fixed asset:
- It is held for use in the business, not for resale to customers.
- It is expected to last longer than a year.
- It has a cost worth recording as an asset rather than a one-off expense.
That last point matters in practice. A £6 stapler technically lasts years, but no sensible business records it as a fixed asset. Most set a sensible cut-off, often called a capitalisation threshold, below which small items are simply treated as a cost. More on that later, because it is one of the things firms most often get wrong.
Fixed Assets vs Current Assets
The cleanest way to understand fixed assets is to put them next to their opposite. Current assets are the short-term things a business owns that will turn into cash within about a year. Fixed assets are the long-term things it keeps to do the work.
| Fixed assets | Current assets |
|---|---|
| Kept and used for years | Used up or sold within a year |
| Help the business operate | Flow through the business |
| Oven, van, building, software | Stock, cash, trade receivables |
| Sit at the top of the balance sheet | Sit lower down, near cash |
This split is not just bookkeeping tidiness. It feeds straight into working capital, the cash a business has to run its day to day operations. Working capital is current assets minus current liabilities, and fixed assets are deliberately left out of it. The reason is blunt: you cannot sell the delivery van to pay Friday's wages. Fixed assets keep the business running, but they are not the money you reach for to settle this week's bills.
Tangible and Intangible Fixed Assets
Fixed assets come in two flavours, and the difference is simply whether you can touch them.
Tangible fixed assets are physical. These are the ones most owners picture first:
- Land and buildings
- Machinery and equipment
- Vehicles
- Computers and IT hardware
- Fixtures, fittings and furniture
Intangible fixed assets have no physical form but still hold real value and last for years:
- Goodwill, often created when one business buys another
- Patents, trademarks and registered designs
- Software licences and certain development costs
- Long-term rights and certain website costs
Intangibles are easy to overlook precisely because you cannot see them, yet for many modern businesses they are the most valuable thing on the books. A software company may own little more than a building's worth of laptops and a great deal of intellectual property. Treating that intellectual property as a real asset, not an afterthought, is part of telling the truth about what the business is worth.
Examples of Fixed Assets, and What Is Not One
The quickest way to make this stick is a short test. Will the business keep it and use it for years? If yes, it is probably a fixed asset.
These usually are fixed assets:
- A van bought to make deliveries
- An oven, lathe or printing press
- The office building a company owns
- A £3,000 server that runs the business systems
These usually are not, even though people assume they might be:
- Stock waiting to be sold. A car dealer's vans on the forecourt are stock, not fixed assets, because they are for resale. The dealer's own recovery truck is a fixed asset.
- Cash and money owed by customers. These are current assets.
- A small tool below your capitalisation threshold. A £20 drill is just an expense.
- Rent on premises you do not own. That is a cost, not an asset, though significant fit-out work on a leased building often is.
The forecourt example is worth holding onto. The exact same physical object, a van, can be stock for one business and a fixed asset for another. What decides it is the purpose, not the thing itself.
How Fixed Assets Appear on the Balance Sheet
On the balance sheet, fixed assets are rarely shown at the price you paid. They are shown at what accountants call net book value, which is the original cost minus the wear and tear charged so far.
That wear and tear is depreciation. Each year a portion of the asset's cost is moved from the balance sheet into your profit and loss account, spreading the cost over the years the asset is actually used. So a £4,000 oven expected to last eight years might be written down by £500 a year, showing a net book value of £3,500 after year one, £3,000 after year two, and so on.
We have a full guide on how depreciation works, including the straight-line and reducing balance methods and a worked example. The short version is this: buying a fixed asset does not reduce your profit all at once. It sits on the balance sheet and releases its cost slowly, which is the whole point of treating it as an asset in the first place.
Does Land Depreciate?
This is one of the most common questions we get, and the answer is a clean exception to everything above. Land does not depreciate. Almost every other fixed asset wears out, becomes outdated or eventually needs replacing. Land does not. It has, in effect, an unlimited useful life, so there is no cost to spread over time.
Buildings are different. The building standing on the land does wear out and is depreciated in the normal way. This is why, when a business buys a property, a good accountant splits the price between the land element and the building element, and depreciates only the building. Charging depreciation on the land would simply be wrong. We cover the reasoning in more detail in our depreciation guide.
The Fixed Asset Register Most Small Firms Skip
A fixed asset register is a simple list of everything the business owns as a fixed asset: what it is, when it was bought, what it cost, how much depreciation has been charged, and its current net book value. Larger companies keep one as a matter of course. Smaller ones very often do not, and it quietly causes problems.
Without a register, three things tend to happen. Assets that were scrapped years ago still sit on the books, overstating what the business owns. Nobody can prove what equipment exists if it is ever lost, stolen or claimed on insurance. And at year end the figures have to be reconstructed from memory and old invoices, which costs time and money.
In our experience, a register is one of the highest value, lowest effort records a growing business can keep. A single spreadsheet, updated whenever you buy or dispose of something significant, is enough to start. It turns your fixed assets from a vague idea into a list you can actually manage.
A Tax Point Worth Knowing
Here is a trap that catches many owners. The depreciation you charge in your accounts is not what reduces your tax bill. HMRC ignores your depreciation figure entirely and uses its own system, called capital allowances, to give tax relief on most fixed assets.
The two often point in different directions. You might depreciate an asset slowly over eight years in your accounts while claiming a large chunk of tax relief on it in year one through allowances such as the Annual Investment Allowance. The accounting view and the tax view are simply answering different questions. We explain the gap in the depreciation guide, and getting the most from allowances is a core part of sensible tax planning. For most businesses, the timing of a large equipment purchase around a year end is worth a quick conversation before the money is spent, not after.
Our View: Set a Threshold and Stick to It
If we had to give one practical piece of advice on fixed assets, it would be this: agree a capitalisation threshold and apply it consistently. Many small businesses either capitalise everything, cluttering the register with £30 kettles, or capitalise nothing, expensing a £5,000 machine in a single month and distorting their profit.
A common sensible threshold for a small business sits somewhere around £200 to £500. Below it, treat the purchase as an expense. Above it, capitalise and depreciate. The exact number matters less than picking one and using it every time, so your accounts stay comparable from year to year and your profit is not jumping around because of how a purchase happened to be recorded.
Fixed assets are not the most exciting part of a set of accounts. But they are often the largest single number on the balance sheet, and how you record, depreciate and track them shapes both your reported profit and the true picture of what your business owns.
How IAK Can Help
We help business owners record fixed assets properly from the day they are bought. Accurate bookkeeping keeps the register and depreciation right month to month, our accounting work turns those figures into year-end accounts you can rely on, and our tax planning makes sure you claim every capital allowance you are entitled to.
If you have bought significant equipment, vehicles or property and you are not sure it is all being recorded and relieved correctly, that is a conversation worth having. Contact us for a straight look at your numbers.
Sources
- IAS 16, Property, Plant and Equipment, sets out how tangible fixed assets are recognised, measured and depreciated, and confirms that land normally has an unlimited useful life. Published by the IFRS Foundation.
- FRS 102, the financial reporting standard most UK small and medium companies use, governs how fixed and current assets are classified and depreciated. Published by the Financial Reporting Council.
- HMRC guidance on tax relief for fixed assets through capital allowances, including the Annual Investment Allowance. See the GOV.UK capital allowances guidance.