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What Are Fixed Assets and Why Should I Acquire Them?
You may have heard the term, "Fixed Assets," before, especially in conjunction with the general ledger or the balance sheet for your accounting needs. Fixed assets are items such as property, equipment, or plants. These assets are those that cannot be easily liquidated should you need cash. Fixed assets include:
- Land and buildings
- Office equipment
- Furniture & Fixtures
Fixed assets depreciate (lose value) over time. This depreciation creates some tax benefits. A fixed-asset is something a company plans to hold for the long-term, to use for business growth and production. You will need at least some fixed assets in order to run your business. There are several different methods for the acquisition of fixed assets. These include:
- Purchasing the Asset Outright
- Long-Term Financing
- Short-Term Financing
- Capital Lease
You should acquire what you need when you need it. For example, when you start or grow your business, you will probably purchase many fixed assets. If you are going to start a graphic design company, you might purchase a computer, software, scanner, quality printer, etc. If you are going to start a construction business, you will purchase the equipment required for that. Fixed assets will differ between industries. Keep track of all business purchases made.
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Purchasing the Asset Outright
For most of the fixed assets your company will need, purchasing the asset outright is the best option. You can purchase the asset new or used. Be aware that if you finance a $600 computer today, your computer will depreciate, and you will likely pay more in interest than the computer will be worth to you.
When you purchase used equipment or vehicles, it is best to do your homework. Make sure that your used items are fully functioning. Purchasing an item outright has the added benefit of not creating a liability associated with the asset.
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Long-term financing of your assets may be required for items like land, a plant, or a business office that you will own. Long-term financing often comes with equity in the item purchased. There are several options for long-term financing for acquisition of fixed assets. Do your homework and find the best deal on interest and closing costs before signing on the bottom line to decrease your company's expenses.
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Short-term financing of assets may be done with short-term loans or credit cards. If you are purchasing a large amount of office supplies, for example, it is possible that you may receive benefits for signing up for a business account with the office supply store. These benefits should outweigh any interest you are going to pay for those supplies. Short-term financing should be a last resort. Never finance something you can pay for outright.
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A capital lease is a fixed term lease that looks an awful lot like a long-term loan agreement for a fixed asset. The capital lease allows the person signing the lease to use the property, equipment, etc. for a fixed-term, but the person leasing is required to pay costs associated with the fixed asset. One reason you might opt to lease rather than purchase is that at the end of the lease, the asset will be owned by the signer based on lease terms. The lease also takes care of things like depreciation, with this figure accounted for in the terms of the lease.
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Finally, a donation is, perhaps, the best way to come across a fixed asset - especially if you are running a non-profit or starting a new business with very little startup capital. Donations are provided to you free of charge. Make sure, when you receive a donation to keep records of the acquisition of fixed assets and when they were donated.