1 00:00:01,190 --> 00:00:05,450 Fixed assets are long-term assets that are tangible. 2 00:00:05,450 --> 00:00:07,210 These are things like property and 3 00:00:07,210 --> 00:00:11,250 equipment, buildings, land, and other things of that nature. 4 00:00:12,300 --> 00:00:17,440 Sometimes on financial statements, these will be listed out as separate line items, 5 00:00:17,440 --> 00:00:19,810 or you might just see property and equipment. 6 00:00:20,910 --> 00:00:25,770 Another common acronym related to fixed assets is PP&E, 7 00:00:25,770 --> 00:00:28,980 which stands for property, plant, and equipment. 8 00:00:28,980 --> 00:00:33,530 With PP&E, we see a return of gross and net terminology. 9 00:00:33,530 --> 00:00:37,590 Gross PP&E and net PP&E, what's the difference? 10 00:00:38,830 --> 00:00:43,330 When you buy a piece of machinery, you have a cost that you paid for it, 11 00:00:43,330 --> 00:00:49,690 that goes into your accounts as a gross asset for whatever price you paid for it. 12 00:00:49,690 --> 00:00:53,330 Then, over time, that asset will depreciate each year, 13 00:00:54,410 --> 00:00:57,970 over the years, this depreciation adds up. 14 00:00:57,970 --> 00:01:02,820 You will see this as a sum total called accumulated depreciation. 15 00:01:02,820 --> 00:01:07,660 So the gross value of the asset minus the accumulated depreciation for 16 00:01:07,660 --> 00:01:11,940 the asset equals the net value of the asset. 17 00:01:11,940 --> 00:01:14,120 Let's walk through a simple example of that. 18 00:01:15,900 --> 00:01:21,240 So, here we are looking at a very simple example of a depreciation schedule. 19 00:01:21,240 --> 00:01:25,508 We see our purchase price of the asset is \$1 million. 20 00:01:25,508 --> 00:01:29,090 The useful life of the asset is ten years. 21 00:01:29,090 --> 00:01:32,700 And, since we're gonna depreciate this asset on the straight line basis 22 00:01:32,700 --> 00:01:36,540 over the ten years, our annual depreciation rate is 10%. 23 00:01:36,540 --> 00:01:39,290 So our depreciation expense, 24 00:01:39,290 --> 00:01:45,050 which would show up on the P&L is \$100,000 a year for ten years. 25 00:01:45,050 --> 00:01:51,120 The gross asset value remains \$1 million throughout the ten year life, 26 00:01:51,120 --> 00:01:55,340 but the accumulated depreciation increases each year. 27 00:01:55,340 --> 00:01:58,000 And in sync with the increase in accumulated depreciation, 28 00:01:58,000 --> 00:02:01,110 the net asset value decreases. 29 00:02:01,110 --> 00:02:06,150 So at the end of ten years, the net asset value of this asset is zero. 30 00:02:06,150 --> 00:02:09,240 Now, this is a very oversimplified example. 31 00:02:10,750 --> 00:02:15,550 As you can imagine, businesses will have many different types of PP&E, 32 00:02:15,550 --> 00:02:20,100 or several of the same type that they purchase at different times and 33 00:02:20,100 --> 00:02:22,098 maybe depreciate on different schedules. 34 00:02:22,098 --> 00:02:24,580 So for example, 35 00:02:24,580 --> 00:02:29,980 a company might depreciate computers over three years but tractors over seven. 36 00:02:29,980 --> 00:02:34,440 They might buy 100 computers spread out over the course of the year. 37 00:02:34,440 --> 00:02:38,830 This means that all these assets are on a different depreciation schedule. 38 00:02:39,830 --> 00:02:45,410 This can be a specific job or team role of an accounting department at big companies, 39 00:02:45,410 --> 00:02:47,880 tracking depreciation schedules for assets. 40 00:02:48,950 --> 00:02:53,290 That said, when you see a balance sheet for December 31st, 41 00:02:53,290 --> 00:02:57,270 the grossed fixed assets accumulated depreciation and 42 00:02:57,270 --> 00:03:02,150 net fixed assets will be the snapshot for all the company's assets at 43 00:03:02,150 --> 00:03:07,290 that point in time regardless of where they are on the depreciation schedule. 44 00:03:08,620 --> 00:03:13,020 One thing to note is that in accounting, land doesn't depreciate. 45 00:03:13,020 --> 00:03:18,180 So you might see land value consolidated in a grossed fixed asset line, but 46 00:03:18,180 --> 00:03:20,760 it won't impact accumulated depreciation. 47 00:03:22,060 --> 00:03:25,970 Again, we're starting to touch on some more advanced topics. 48 00:03:25,970 --> 00:03:29,660 For example, what happens if an asset is fully depreciated but 49 00:03:29,660 --> 00:03:32,560 still provides economic value or use to the business? 50 00:03:33,580 --> 00:03:37,100 In the interest of time, we're not gonna be covering that in this course. 51 00:03:37,100 --> 00:03:40,765 But in the teacher's notes, I provided some links for further exploration.