Difference between Fixed Assets and Current Assets

Fixed Assets and Current Assets are two types of assets found on a company’s balance sheet, each representing different types of resources owned by the company. Fixed Assets are long-term assets that are not expected to be converted into cash or consumed within one year of the balance sheet date; whereas, Current Assets are assets that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer.

What are Fixed Assets?

Fixed Assets, also known as non-current assets or tangible assets, are long-term assets held by a company for use in its business operations rather than being held for sale. These assets are not expected to be converted into cash or consumed within one year of the balance sheet date. Fixed Assets are recorded at historical cost on the balance sheet, and their value may be depreciated over time to reflect their use and wear and tear.

Examples of fixed assets include:

• Property, Plant, and Equipment:
  • Land: Includes the cost of purchasing land for business use.
  • Buildings: Includes cost of constructing or acquiring buildings for office space, manufacturing facilities, or other purposes.
  • Machinery and Equipment: Includes cost of machinery, tools, and equipment used in production processes or other operations.

• Intangible Assets:
  • Patents: Includes exclusive rights granted to the company for a specific invention or product.
  • Trademarks: Includes distinctive signs, symbols, or logos used to identify the company’s products or services.
  • Copyrights: Includes exclusive rights granted for original works of authorship, such as literary, artistic, or musical works.
  • Goodwill: Represents the excess of the purchase price of acquired businesses over the fair value of identifiable net assets acquired.
• Long-term Investments:
  • Investments in subsidiaries, affiliates, or other companies held for strategic purposes rather than for short-term trading.
  • Bonds, stocks, or other securities held for long-term investment purposes.

What are Current Assets?

Current Assets are the type of assets found on a company’s balance sheet. These assets are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer. Current Assets are crucial for a company’s day-to-day operations and liquidity, as they represent resources that can be readily accessed to meet short-term obligations and fund ongoing business activities.

Examples of current assets include:

• Cash and Cash Equivalents: Includes physical currency, demand deposits, and other highly liquid assets that can be quickly converted into cash with minimal risk of loss in value.
• Accounts Receivable: Includes amounts owed to the company by customers for goods or services provided on credit. These receivables represent future cash flows that the company expects to receive within a relatively short period.
• Inventory: Includes goods held for sale in the ordinary course of business, including raw materials, work-in-progress, and finished goods. Inventory is expected to be sold or used up in the near term to generate revenue.
• Prepaid Expenses: Includes payments made in advance for goods or services that will be received in the future. Common examples include prepaid rent, insurance premiums, and prepaid subscriptions.
• Marketable Securities: Includes short-term investments that can be easily bought or sold in the financial markets, such as treasury bills, commercial paper, and money market funds. These investments provide the company with additional liquidity while earning a return on idle funds.
• Other Current Assets: This category may include miscellaneous assets that do not fit into the above classifications but are expected to be converted into cash or used up within one year. Examples may include advances to suppliers or employees, and certain tax assets.

Difference between Fixed Assets and Current Assets

Basis	Fixed Assets	Current Assets
Meaning	Fixed Assets are long-term assets that are not expected to be converted into cash or consumed within one year of the balance sheet date.	Current Assets are assets that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer.
Nature	These are long-term assets.	These are short-term assets.
Purpose	Fixed Assets are used for long-term operational needs or investment purposes.	Current Assets are used to facilitate day-to-day operations and ensure liquidity for short-term needs.
Liquidity	They are less liquid, as they cannot be readily converted into cash.	They are more liquid, as they can be quickly converted into cash to meet short-term finance needs.
Recording	They are recorded at historical cost and may be subject to depreciation or amortization.	They are recorded at their current market value or lower of cost or market value.
Presentation	Fixed Assets are shown under non-current assets on the balance sheet.	Current Assets are shown under current assets on the balance sheet.
Importance	Fixed Assets are crucial for the company’s long-term growth and stability.	Current Assets are essential for maintaining liquidity and meeting short-term obligations.
Evaluation	It’s value may change due to depreciation or impairment.	It’s value tends to fluctuate based on market conditions and business activities.
Examples	Includes land, buildings, machinery, vehicles, equipment, intangible assets (patents, trademarks, goodwill), long-term investments.	Includes cash and cash equivalents, accounts receivable, inventory, prepaid expenses, short-term investments.

Fixed Assets and Current Assets – FAQs

How is the value of fixed assets determined?

The value of fixed assets is initially determined based on the cost incurred to acquire them. However, the value may be adjusted for depreciation, impairment, or appreciation.

Why are current assets important?

Current Assets are crucial for maintaining liquidity and ensuring that a company can meet its short-term financial obligations, such as paying suppliers, employees, and creditors.

How are current assets managed?

Current Assets are managed through effective working capital management practices, which involve optimizing the levels of cash, receivables, and inventory to ensure adequate liquidity without tying up excess capital.

What role do fixed assets and current assets play in financial analysis?

Fixed Assets and Current Assets are essential components of financial analysis, providing insights into a company’s asset base, operational efficiency, liquidity, and financial health. Analysts evaluate trends in asset turnover, asset composition, and asset management practices to assess a company’s performance and investment potential.

How do changes in fixed assets and current assets impact a company’s financial statements?

Changes in fixed assets, such as depreciation or impairment, can affect a company’s profitability and financial position by impacting its net income, total assets, and equity.
Changes in current assets, such as fluctuations in inventory levels or accounts receivable turnover, can impact liquidity, working capital, and overall financial stability.