Fixed Assets, Intangible Assets, & Capex
Fixed & Intangible Assets are often times a tricky subject in Accounting.
Instead of expensing something that you purchased…it actually goes on the Balance sheet…
and gets brought into the P&L via a notorious account called Depreciation / Amortization.
What are Fixed Assets?
Fixed assets are physical assets that are utilized over a long period of time These assets often times can’t get easily converted to cash So for example…let’s say you buy a $50,000 piece of medical equipment. Because you can expect to utilize this equipment over a long period of time… it gets capitalized on the Balance Sheet as a Fixed Asset, rather than being expensed on the P&L. Now…let’s say you buy a $20 stapler… and you have every intention of making this stapler last the next 5 years… do you record the stapler as a fixed asset? Not really…since the amount is immaterial. So the general idea is that you want to analyze both the length of benefit that you expect to receive… as well as the level of materiality (generally anything above $1k, but it can vary from company to company)
What is Capex?
Capex stands for Capital Expenditures, and it represents the $$ used to acquire Fixed Assets
Examples can be:
🔧 Machinery & Equipment
🏨 Buildings / Land
What is Depreciation?
Depreciation represents the wear and tear of your assets It is often times recorded in your “Other Expense” category, but can also be a Cost of Goods Sold if your business sells machinery. The most common method for depreciation your asset is via what is called Straight Line Depreciation… where you take the assets cost… less the salvage value (the value you can sell it for after it is fully depreciated)….
and divide it over it’s useful live evenly. There are a few other depreciation methods that can be used, depending on your preference, and tax laws.
How do Fixed Assets get recorded?
Since fixed assets are used over multiple periods, they get capitalized on your balance sheet When you make a purchase: Debit Fixed asset Credit Cash
As time progresses, you would then record your depreciation expense as such:
Debit Depreciation Expense
Credit Accumulated Depreciation
Note that Accumulated Depreciation is a contra asset, which means it reduces the value of your fixed assets
Intangible Assets & Amortization
Intangible assets behave similarly to fixed assets in that they are capitalized on your balance sheet, and are reduced in value as time progresses Instead of depreciating the balance, you would amortize the balance as such: Debit: Amortization Expense Credit Accumulated Amortization Common examples of Intangible Assets are:
Where it all shows up on the Statement of Cash Flows
You may recall that the Statement of Cash Flows is divided by 3 sections:
Cash from Operating Activities ➡️ represents cash movements from operating your business
Cash from Investing Activities ➡️ represents cash movements from long term assets invested in the business
Cash from Financing Activities ➡️ represents cash movements from amounts financed to/from the business
Which are would you say capex goes in? If you guessed Cash from Investing activities…you are right. Remember…the whole idea is that you are INVESTING in these assets for LONG TERM use. Although your purchase of fixed / intangible assets are an investing activity…. your depreciation & amortization is an operating activity… since the use of these assets are part of your ordinary course of business.
Fixed Assets, Intangible Assets, and Capex can be confusing.
Why do we expense some items, and capitalize others?
Hopefully this summary gives you a framework for how it all ties in.