Businesses purchase many goods that are necessary to continue running or to improve the company in some way. The vast majority of these purchases are small expenses, such as office supplies, internet, utilities, rent, or marketing materials, etc.

However, some necessary expenditures have a much higher dollar value and a much longer useful life, items like vehicles, buildings, factory equipment, etc. Such purchases are considered “fixed assets” and are treated differently in the books.

When is something considered a fixed asset? Each company’s definition will vary slightly. There is typically a monetary cutoff, such as $2,500, but time is another consideration. If a company pays more than $2,500 for a piece of equipment that they know won’t last a full year, then it’s not a fixed asset, in spite of the high dollar value.

If the item costs more than the business’s monetary cutoff and it has a useful life of multiple years, then it is considered a fixed asset and its expense can be recognized over the years of its useful life. We’ll discuss the process of recognizing the expense (depreciation or amortization) in another post.