What Are Net Fixed Assets? Formula, Example, And Importance
There are different areas in the balance sheet of a company that is analyzed by an investor before making an investment, approving finance, or acquiring the whole company.
Net fixed assets play an essential role in a business as they occupy a large portion of the balance sheet operation areas. Fixed assets are depreciated over their useful life, so these assets lose their value over time, and it is necessary to record them truly in the company’s balance sheet.
What Are Net Fixed Assets
Net fixed assets is an accounting metric that helps a company to determine the true or residual value of assets after deducting the accumulated depreciation. impairment, and liabilities associated with purchasing those assets.
- Depreciation is something that reduces the value of assets over their useful life
- Impairment is the sudden loss because of physical damage to assets or demand
- Liabilities are the borrowed money that can be used in acquiring assets
How To Calculate Net Fixed Assets
The net fixed assets figure is very important when acquiring a company as it helps investors to know the actual value of the company in the market and the capital amount invested in the company. The net fixed assets can be calculated using the following formula.
Net Fixed Assets= Total Assets Of The Company – Accumulated Depreciation, Impairment, and liabilities associated with the purchase of assets.
Net Fixed Assets Example
Example 1: A company purchased a delivery van worth $10,000 on 31 January 2020 and depreciate it on straight-line bases the life of the delivery van was 10 years when it was acquired. The company policy is to charge depreciation at the start of the year. Other accounts of the company are the following as on 31 January 2020:
| Account | ($) Amount |
|---|---|
| Land | $30,000 |
| Building | $50,000 |
| Equipment | $10,000 |
At the end of 2022, there was an impairment loss of $2,000 and a liability of $5,000. The company did not charge any depreciation on the building and equipment.
Calculate the net fixed assets for 2022.
Net Fixed Asset= ($10,000+$30,000+$50,000+$10,000) – ($3,000+$2,000+$5,000) = $90,000
Example 2: XYZ company is evaluating its performance for the year 2023. The company’s balance sheet is following:
| Account | ($) Amount |
|---|---|
| Total Assets | $1,000,000 |
| Accumulated Depreciation | $50,000 |
| Capital Improvement | $10,000 |
| Impairment Loss | $30,000 |
| Liabilities | $60,000 |
Liabilities in the above table show the amount that is associated with purchasing assets. Calculate the net fixed assets for the XYZ company for the year 2023.
Net Fixed Assets= $1,000,000 – ($50,000+$10,000+$30,000+$60,000) =$8,50,000
Importance Of Net Fixed Assets In A Business
Net fixed assets play a vital role in business operations and revenue making. The followings are the major role of net fixed assets in a business.
- Net fixed assets help a business in making revenue by producing goods or delivering services more efficiently
- The assets hold a large portion of business capital
- These assets fulfill the production demand and increase the company’s growth over time
- These assets help a business in maintaining its cash flow for a long period
- Getting a loan can be easy if a business holds a high portion of net fixed asset
- Well-maintained net fixed assets attract more investors to invest in a business
- These assets are recorded in the balance sheet of a business which helps investors to look at how assets are performing to generate revenue for the business, etc.