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Tools and Equipment For Accounting Treatment

This article is about tools and equipment accounting treatment, tools and equipment chart of accounts, define tools and equipment, classification of tools and equipment, tools and equipment expenses, small tools and equipment chart of accounts.

Small tools and equipment chart of accounts, different between account tools and devices, hardwares, software plus source for accounting on a cost for devices and equipment

What Are Fixed Assets?

Fixed assets are the property and equipment owned by a company. They include land, buildings, machinery and equipment, furniture and fixtures, vehicles, computers and software. Fixed assets can be used in the operation of your business or held for investment purposes.

When you buy a fixed asset, you record the purchase in your company’s books as an expense. The amount that you pay for the asset is recorded as a debit to accounts payable for purchases or cash for cash purchases, depending on how you pay for it. If you borrow money to purchase an asset, you record the loan as a liability on your balance sheet and record interest paid as an expense on your income statement.

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.

Learn how to calculate fixed assets by jumping to the section below.

What Are Net Fixed Assets?

Net fixed assets are the value of a company’s fixed assets minus any depreciation. Fixed assets are things like land, buildings, machinery and equipment that are purchased by a company to use in their operations. These assets have an expected useful life of more than one year and show up on the balance sheet of a company.

Depreciation is an accounting term that refers to the reduction in value of an asset over time due to wear and tear, damage or obsolescence. It can be calculated by taking the original cost of an asset and dividing it by its estimated useful life. For example, if you spend $10,000 on a computer that has an expected useful life of five years, then it would depreciate at $2,000 each year until all its value is gone after five years (assuming no additional costs).

Since fixed assets lose value over time due to depreciation, companies need to account for this loss when calculating net fixed assets because it will affect their bottom line if they don’t adjust for it accurately in their financial reporting system.

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 items that are used to make a company’s revenue, rather than for personal use. It’s important to know what fixed assets are because they have a big impact on your taxes.

Fixed assets include things like computers, office furniture, and machinery. If you buy something that is used in your business but doesn’t fall under any of the other categories of assets, it’s probably a fixed asset.

You may be able to deduct the cost of a fixed asset from your taxable income if it meets certain conditions. You can also depreciate the value of these assets over time so that you only pay taxes on the portion of their value that was used up during the year.

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. Cost less 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, a tool wears out.

The IRS decides the rate that 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.

Tax Deductions for Work-Related Expenses for Tools

You must itemize deductions to deduct work-related expenses such as buying or repairing tools required for your job. List your miscellaneous deductions on Schedule A. The deduction for tools is applicable if you are self-employed or if you work for someone else and have to provide your own tools.


As an employee, you can only deducted unreimbursed money you spend on tools. You may be eligible to deduct other unreimbursed work-related expenses, such as professional and union dues, legal fees you incurred as part of keeping your job, medical expenses required by your employer and work-related travel. Educational expenses related to your work, computer and cell phone depreciation, malpractice insurance premiums and professional license fees also may help lower your tax burden.

Deduction Threshold

When you work for someone else, you can only deduct tools and other expenses exceeding two percent of your adjusted gross income (AGI), according to Bankrate. For example, if your AGI is $40,000, you can only deduct expenses over 0.02 x $40,0 = $800. The tools must be necessary for you to do your job. You may have to fill out additional tax forms detailing the expenses to prove they were ordinary and necessary as defined by IRS rules. Keep all your receipts; even small expenses can add up and help you tip the scale.

Small Business Deductions

As a small business owner, you deduct all the expenses related to your business. Tools, office equipment, payroll, travel and office or warehouse space all are tax deductible. Larger tools that you use for more than a year and add to the quality or quantity of services or products you can deliver are considered capital expenses and are treated differently for tax purposes.

Capital Equipment

Typically, small business owners can deduct only a portion of the costs of tools that last for longer than a year, according to the U.S. Small Business Administration. By depreciating the equipment over its expected lifetime, you can take a portion of the costs off your taxes each year until it is fully depreciated. Tools that fall under this category must be necessary to run your business and must be owned by you. There are exceptions that may qualify for a total deduction in the year you bought the machinery. The exemption is called a 179 deduction and covers a wide range of property and work-related equipment.

Is Equipment a current asset?

Equipment is not considered a current asset. Instead, it is classified as a long-term asset. The reason for this classification is that equipment is designated as part of the fixed assets category in the balance sheet, and this category is a long-term asset; that is, the usage period for a fixed asset extends for more than one year. This classification of equipment extends to all types of equipment, including office equipment and production machinery.

Equipment is not considered a current asset even when its cost falls below the capitalization threshold of a business. In this case, the equipment is simply charged to expense in the period incurred, so it never appears in the balance sheet at all – instead, it only appears in the income statement.

When equipment in the fixed asset category is expected to be sold off or otherwise disposed of within one year, its book value is still classified as a long-term asset; even in this situation, it is still not classified as a current asset.

If a business routinely engages in the purchase and sale of equipment, these items are instead classified as inventory, which is a current asset. For example, a distributor of copiers may maintain a large number of copiers, all of which are classified as inventory.


A Quick Reference Guide to Tools and Equipment Accounting Treated as Major Items of Plant. As tools and equipment are accounted for in a company, it is very important that they are treated appropriately. Adequate accounting procedures must be followed to ensure that tools and equipment are not overlooked and unrecorded.

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