Difference Between Fixed Assets And Current Assets
The balance sheet is a crucial roadmap when analyzing a company's financial health. But within this intricate map lies a crucial distinction: the difference between fixed assets and current assets. Understanding this distinction is fundamental to deciphering a company's long-term sustainability and ability to navigate short-term financial needs. Let us understand these concepts in detail. Learn about the concepts of fixed and current assets and explore the difference between fixed assets and current assets.
Must Read – What is Finance?
Comparison Table – Fixed Assets vs Current Assets
The main difference between fixed assets and current assets is that current assets can be quickly converted to cash, while fixed assets are long-term assets that a business relies on to deliver long-term growth. Let's explore more such differences between the two -
| Fixed Assets | Current Assets | |
| Definition | A fixed asset is a company asset that cannot be converted into liquidity in the short term. | Current assets are a company's assets that can become liquid (turn into money) in less than 12 months. |
| Dwell time | Fixed assets remain with the company for over a year; thus, they are called fixed assets. Their usefulness for the medium or long term. | Current assets remain within the company for less than a year. Thus, they are short-term utility. |
| Liquidity | Fixed assets do not have much liquidity because their main utility is keeping the company operational and supporting its equity. | Current assets are more liquid because they primarily provide the necessary cash flow for operations. |
| Mobility | Fixed assets, such as plants, machinery, and equipment, are usually immobilized. | Current assets usually move the most in a company, almost daily. |
| Accounting purposes | Fixed assets are capitalized within the balance sheet according to their initial value and are also included in equity. | Current assets must be converted to cash within one year. They will be reflected in the financial statements as part of the cash flow, which is part of equity. |
| Operating profits | Fixed assets are used to maintain the operation of a company, and they are not returned to the market until they are disposed of. | Current assets are traded daily and are used by the company to obtain the financing it needs to sustain itself. |
| Financial relevance | Fixed assets support the acquisition of new assets and the company's growth. | Current assets help to give an idea of the stability of the company. |
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What are Fixed Assets?
Fixed assets cannot be converted into money in less than a year. Therefore, it is closely related to treasury and is fundamental in establishing the business's solvency, covering its administrative expenses, and making investments.
Eventually, these assets can be decommissioned or sold due to obsolescence or current technology. The useful life of a fixed asset is the time during which the company makes use of it until it is no longer useful to the company.
Factors that influence the useful life of a fixed asset:
- Use and time
- Technological obsolescence
Examples of fixed assets –
- Furniture
- Real estate (commercial premises, factories, workshops, etc.)
- Office equipment
- Machinery
- Investments
- Patent Rights
- Transportation equipment
What are Current Assets?
Current assets are highly liquid resources and possessions a company expects to use or convert into cash within one year or its operating cycle, whichever is longer. They are the most liquid assets on a company's balance sheet, which can be quickly accessed to cover short-term expenses or liabilities.
Here are some examples of current assets:
- Cash and cash equivalents: This includes physical cash on hand, money in checking and savings accounts, and other short-term investments that are readily convertible to cash.
- Accounts receivable: This represents the money owed to the company by its customers for goods or services sold on credit.
- Inventory: This includes raw materials, work-in-progress goods, and finished products that are held for sale.
- Prepaid expenses: This represents expenses paid in advance, such as rent, insurance, and utilities.
- Marketable securities: This includes short-term investments in stocks, bonds,
Key Takeaways
- The assets on a company’s balance sheet are generally classified as current or fixed assets.
- Current assets are highly liquid and can be easily converted to cash within a year.
- Fixed assets are long-term assets businesses use to finance the production of goods and services, including property, plant, and equipment (PP&E).
- Investors may feel more comfortable investing in companies with higher current asset ratios because these companies can easily raise the money needed to keep their operations running.
FAQs - fixed assets vs current assets
How do fixed assets and current assets impact a company's financial position?
Fixed assets represent a company's long-term investments and operational capabilities, whereas current assets support day-to-day operations and liquidity.
Are fixed assets or current assets more liquid?
Current assets are more liquid since they can be readily converted into cash within a short time, while fixed assets are less liquid and not easily converted into cash.
How are fixed assets and current assets reported on the balance sheet?
Fixed assets are listed under the non-current (or long-term) assets section, while current assets are found in the current assets section of the balance sheet.
Why is it important to distinguish between fixed assets and current assets?
Distinguishing between them helps assess a company's short-term liquidity (current assets) and long-term investment in operational resources (fixed assets).
How are changes in the value of fixed assets and current assets reflected in financial statements?
Changes in the value of current assets can fluctuate frequently due to market conditions, impacting the income statement and balance sheet. Changes in fixed asset value are mainly due to depreciation or impairment and are reflected in the balance sheet and income statement over time.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
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