Is an Asset Still 'Fixed' if Sold Within 3 Months? Let's Discuss Its Classification

A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time.

Definitions of Fixed Assets state that fixed assets are those assets which are not converted into cash for at least one year.

1) Suppose we purchase an asset and sell it within 3 months due to some unexpected reason, would it still be treated as a fixed asset?
2) Would it be included in the fixed asset register?

Regards,
Bindhu

If you sold it, it will not be reflected in Average Net Fixed Assets. Bear in mind that the depreciated value of fixed assets is also part of working capital.

Regards.

Thank you very much for the reply. Could you please explain in detail? If the asset is sold before one year, will it be treated as a Fixed Asset disposal or a normal sale?

Regards,
Bindhu

Then how can we say that the assets which are used for more than one year are called Fixed Assets?

I think your queries are hypothetical. Fixed or immovable assets are counted from day one. Once it crosses a year, the depreciated value comes into the picture. When you dispose of an asset, the revenue received from the disposal comes under miscellaneous revenue. In any company, the accounting is as follows:

1. Average Net Funds Employed = Stock/inventory value + Average net Fixed Assets (depreciated value as applicable)
2. Return on Capital Employed = Gross Margin/ANFE (annualized)
3. Net Margin = GM - PBIT
4. EVA = Net Margin - interest on ANFE

Pon

Whenever you buy fixed assets, you have to record them in the Fixed Asset Register (FAR). Even small items like a whiteboard or a table in the boardroom are also considered fixed assets. Now, by chance, after three months of purchase, if the table starts creaking due to the inferior quality of wood and becomes unusable, it has to be written off. It does not matter whether you write it off after three months, six months, or a year. Once you write it off, make the respective entries in the FAR.

I don't think there is a rule that prohibits writing off any fixed asset before one year.

I know of a classic case involving a major sweet manufacturing company in Chennai. During the festival season of Deepavali, they purchased about 80 weighing scales imported from China. Unfortunately, all the 80 weighing scales barely worked till the end of the festival season and became unserviceable. The company had to write off all 80 weighing scales in just three months!

Regards,
Dinesh V Divekar

Dear Bindhu, I checked Wikipedia on Fixed Assets. [Click here](http://en.wikipedia.org/wiki/Fixed_Asset) to read the article.

Part of the article says that "The use of assets in the generation of revenue is usually more than a year, that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period, depreciation is charged on the total value of assets that contributed to the revenue for the period in consideration and charged against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period."

This one-year clause relates to depreciation only. But that does not mean that you should make entries in FAR after one year of its purchase. We should record details of fixed assets in FAR immediately after purchase.

Ok... DVD