A fixture is a capital asset in accounting. This means a fixture is classified as a long-term asset and must be shown in the balance sheet of the financial statements. A fixture is a permanent attachment to real estate such as built-in, non-removable shelving or lighting units permanently attached to a ceiling or wall. Specific rules that pertain to accounting for a fixture include how it is expensed and how it is depreciated over time. Depreciation means you must take a percentage deduction for the expenditure over its estimated tax life as determined by the Internal Revenue Service. If a fixture is attached to real estate, it is treated the same way real estate is treated.
How to Record a Fixture Purchase
Since a fixture is a capital asset, the expense isn’t shown initially in the profit and loss statement as an expense. Instead it is recorded as a capital purchase, which means it first appears in the balance sheet. The accounting entry would be to debit “fixtures” in the balance sheet and credit cash, which is also shown in the balance sheet. This way, it appears as an asset and not an expense.
A fixture must be depreciated in the same fashion as business real estate. This means it must be depreciated over a 30-year life. For example, if your business purchases $3,000 in fixtures at the beginning of the year, you would expense one-thirtieth of the cost in the first year. This would be a first-year deduction of $100, and you would continue to deduct this amount each year. The accounting entry for depreciating a fixture would be to debit depreciation expense in the profit and loss statement for $100 and credit depreciation allowance in the balance sheet for $100.
How to Determine a Fixture’s Adjusted Basis
Since a fixture is a capital asset, you have to keep track of its basis for tax purposes. The basis is the value that a fixture has after considering the initial cost and subtracting the depreciation allowance taken as an expense. For example, if a fixture cost $3,000 two years ago, and during the past two years a depreciation deduction was taken in the amount of $100 per year; at the end of two years, the fixtures would have an adjusted basis of $2,800 ($3,000 less $200.) The adjusted basis is then used when determining the gain on the sale of the fixtures. If the fixtures were sold in a year for $4,000, the recognized gain would be $1,200 ($4,000 less $2,800).
Proper classification of fixture purchases is important in accounting, because if fixtures are shown as an expense instead of a capital asset, the profit in the business will be incorrectly understated. The recorded expenses would be higher than they should be. If you own your own business and are unsure how to classify a fixture-type purchase, you should consult with a tax accountant or CPA before making an entry in your books.
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