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Meaning of Tools and Equipment in Accounting

The term “equipment” in accounting broadly refers to non-current assets. This is because non-current assets can be broken into two categories: fixed assets and intangible assets. While intangible assets are not considered equipment in the historical sense, they are technically on the same level and are therefore treated like equipment when it comes to financial calculations.

Tools and equipment are items used by a company to operate in the day to day business. They might be assets that are acquired like on old glock or they might be expensed if “Leased”.

Equipment may be defined as all such instruments which are used for producing any product or machine or service. They have specific design to handle specific activities. They are purchased for long period. So, equipment is the part of fixed assets. We charge depreciation on equipment with certain rate of depreciation. For showing its correct written down value in books of company. We may give other name of equipment like tool, implement, or apparatus. There is little difference between machine and equipment. Machine has its own system to do any work but equipment is just a mechanical tool for using production or making or repairing any big machine. That is the reason, we keep all equipment in separate head in fixed assets.

Now we are discussing equipment which is used in accounting

1. Financial Calculator

 A financial calculators is an electronic calculator that performs financial functions commonly needed in business and commerce communities.

2. Computer Printer

For printing accounting reports.

3. Accounting Software

For recording, saving and analysis of transaction.

4. Photocopiers

For photocopy of any original accounting report.

5. Unit record Equipment

To record the units. There is no such equipment is used.

6. Unit Measurement Equipment

For measuring inventory’s unit. Read more detail of units of measurement of inventory

7. Other

According to the need of accounting work.

Equipment and Machinery

Equipment and machinery (sometimes they are kept in separate accounts) are those major tools and implements used in the operation of the business. For a service company, these can include computers, copiers, telephone systems, and any electronic gear. For a manufacturing company, they include such things as drill presses, lathe machines, sanders, and other large tools.

What Are Fixed Assets? A Simple Primer for Small Businesses

In accounting, fixed assets are physical items of value owned by a business. They last a year or more and are used to help a business operate. Examples of fixed assets include tools, computer equipment, and vehicles. According to The Balance, fixed assets help a company make money, pay bills in times of financial trouble, and get business loans, according to The Balance.


Assets are everything a business owns. They are found on the left side of a balance sheet.

There are two types of assets: current and fixed assets. Current assets are assets that can be quickly converted into cash. They include cash, accounts receivable and inventory. The more current assets a small business has the better, as this means they can survive longer without borrowing money.

Fixed assets are physical items that last over a year and have financial value to a company, such as computer equipment and tools.

Assets are also categorized as either tangible or intangible. Tangible assets are physical objects that can be touched, like vehicles. Intangible assets are resources that have no physical presence, though they still have financial value. Examples include copyright and brand recognition.


Liabilities are everything a business owes, now and in the future. They are found on the right side of a balance sheet. A common small business liability is money owed to suppliers i.e. accounts payable.

All businesses have liabilities, unless they exclusively accept and pay with cash. Cash includes physical cash or payments made through a business bank account.

There are two types of liabilities: current and long-term liabilities. Current liabilities need to be paid back within a year and include credit lines, loans, salaries and accounts payable. Many company expenses are current liabilities.

Long-term liabilities can be paid back after a year and include mortgages and bonds.

Accounting Formula

A business’s balance sheet helps an owner discover what their company is worth and determine the financial strength of their business, according to the U.S. Small Business Administration.

The accounting formula (also known as the basic accounting equation) is a way to calculate this net worth. To find this amount, use the following formula:

Total Assets – Total Liabilities = Equity

Equity means a company’s net worth (also known as “capital”).

Equity should be positive and the higher the number the better. A negative number means that the business is in trouble and action needs to be taken to minimize liabilities and increase assets.

The balance sheet should also be reviewed periodically to make sure a business’s liabilities are not growing faster than its assets.

What Are Fixed Assets?

Fixed assets are physical (or “tangible”) assets that last at least a year or longer. They are purchased with the specific aim to help operate a business. Fixed assets are also known as capital assets, according to The Balance.

There are several types of assets. That said, all assets are the same in that they have financial value to a business (or individual).

Types of fixed assets common to small businesses include computer hardware, cell phones, equipment, tools and vehicles.

  • For example, a dog walking business owner buys a van to transport her clients’ dogs to the park. She reads reviews and buys a business cell phone to stay in touch with her clients while on the road. She has a laptop she uses to invoice her clients, do marketing work and answer client emails. After a few years, she decides to expand her business and buys a building to run a boarding and grooming facility. There are all examples of fixed assets.

Fixed assets are different from items you might expense on your taxes. These items may last more than a year, but they are of lower value and are not major investments.

  • For example, the dog walking business owner buys heavy-duty leashes, portable water dishes, a backpack and good shoes to make her job safer and more comfortable. She writes off these items on her taxes.

Some industries need more fixed assets than others in order to make products or deliver services. These include the construction, farming, transportation and fishing industries.

Fixed assets are important for three reasons:

  1. They are used to make money. You use your laptop to do marketing, which generates more business.
  2. They can be sold. If a major client disappears and your cash flow is in trouble, you could sell your computer server, for example, to keep your business afloat.
  3. They can help you get you a business loan. Fixed assets can act as collateral (or a guarantee of repayment). This means the lender can take your fixed assets if you don’t pay them back.

A company needs to have more assets than liabilities so that it has enough cash (or items that can be easily converted into cash) to pay its debts. If a small business has more liabilities than assets, it won’t be able to fulfil its debts and is considered in financial trouble.

Still, liabilities aren’t necessarily bad as they can help finance growth. For example, a line of credit is taken out to purchase new tools for a small business. These tools will help the company operate and grow, which is a good thing. The trick is to make sure liabilities don’t grow faster than assets.

What Are Net Fixed Assets?

Net fixed assets are your total fixed assets minus any depreciation on your fixed assets and any liabilities, according to Accounting Tools. Simply put, this means that you need to account for any decrease in value of your fixed asset.

  • For example, the car you use for business purposes decreases in value year by year.

And you also need to account for any liabilities, like loans you owe on your fixed assets.

  • For example, you took out a loan to buy a tractor for your small farm.

Net fixed assets are used by small business owners to figure out how much their total fixed assets are really worth or how much liability they have.

  • For example, a graphic designer has $5000 in fixed assets but after he accounts for depreciations and loans owing on his fixed assets, he actually has a liability of -$100.

Gross fixed assets, on the other hand, are what we call simply “fixed assets” or fixed assets before taking into account depreciation and liabilities.

Find your net fixed assets by looking at your balance sheet in your accounting software. FreshBooks has cloud accounting software that makes finding and understanding your balance sheet simple.

What Items Are Fixed Assets?

Fixed assets are tangible assets that last at least a year or longer.

Here are a list of items that are considered fixed assets, according to Accounting Tools and the Houston Chronicle:

  • Computer hardware
  • Computer software (only the most expensive types)
  • Cell phones
  • Furniture (filing cabinets, desks, sofas, chairs etc.)
  • Fixtures (sinks, lighting, faucets etc.)
  • Tools
  • Machinery (production line machinery, tractors, lumber cutting etc.)
  • Equipment (wrecking balls, pneumatic drills etc.)
  • Vehicles
  • Boats
  • Buildings (includes trailers and warehouses)
  • Costs incurred to improve a leased space
  • Office equipment (photocopiers, fax machines, postage meter etc.)
  • Land
  • Modular office buildings
  • Company or customer parking lot or garage
  • Warehouses

What Are Fixed Assets on a Balance Sheet?

Fixed assets are usually found on a balance sheet in a category called property, plant and equipment, according to Dummies.

Use your accounting software to find the balance sheet, one of the major financial statements small businesses use. FreshBooks has cloud accounting software that makes finding and understanding your balance sheet simple.

Below is an example of a balance sheet:

example of a balance sheet

Source: Dummies

Accumulated depreciation is subtracted from fixed assets to produce the line item: “cost less depreciation.” This is also known as net fixed assets. Costless depreciation shows business owners the true value of their assets or even their total liabilities on fixed assets (if the number’s negative thanks to loans etc.).

Fixed assets can also simply be listed as “fixed assets” with a line item beneath to account for depreciation, like in the below example:

balance sheet

Source: Manager Forum

Depreciation is when an asset decreases in value, usually because of normal wear and tear. Most fixed assets decrease in value–a van gets old, a computer slows down, or a tool wears out.

The IRS decides the rate at which different types of assets depreciate. This depreciation then becomes a write-off on a business’s taxes; there is no tax on depreciation. This IRS article has further information and the forms you need for your taxes to report depreciation properly.

What Is the Formula for Fixed Assets?

A formula is used when calculating net fixed assets, according to My Accounting Course.

The net fixed assets formula is:

Total Fixed Assets – Accumulated Depreciation = Net Fixed Assets

You can refine this formula further to make the result even more accurate:

(Total Fixed Asset Purchase Price + Improvements) – (Accumulated Depreciation + Fixed Asset Liabilities) = Net Fixed Assets

Improvements include any upgrades you make to an asset.

  • For example, if you lease a space for your business and improve it by installing new lighting and carpets, you can add the cost of those improvements to the price of your lease when calculating the next fixed assets.

Fixed asset liabilities are any debts owed on fixed assets.

  • For example, if you take out a loan to pay for a new laptop for your business, this is considered a liability

The ratio of total fixed assets to depreciation is also useful. A higher depreciation means that a business hasn’t replaced its fixed assets. An owner could look at this number and decide if they need to replace anything to improve their operations.

  • For example, $10,000 : $2000 vs. $10,000 : $7000 (equipment may be outdated)

Investors also use this ratio to decide when a company may be purchasing major new fixed assets.


Equipment is raw material. It’s the big stuff that you have lying around your shop. It’s generally not useful all by itself and requires some… What’s included in the purchase price of equipment? In accounting, whenever an entity buys or otherwise acquires a new piece of equipment, it has to record this transaction!

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