Current Assets vs. Fixed Assets: An Overview
Companies own a variety of assets that are used for different purposes. These assets also have different time frames in which they are held by a company. Companies categorize the assets they own and two of the main asset categories are current assets and fixed assets; both are listed on the balance sheet.
The balance sheet shows acompany'sresources or assets while alsoshowinghow those assets are financed; whether through debt, as shown underliabilities, or through issuing equity,as shown in shareholder's equity.
Current assets are short-term assets, which are held for less than a year, whereas fixed assets are typically long-term assets, held for more than a year. However, there are other differences between them.
Key Takeaways
- Current assets are short-term assetsthat are typically used up in less than one year. Current assets are used in the day-to-day operations of a business to keep it running.
- Fixed assets are long-term, physical assets, such as property, plant, and equipment (PP&E). Fixed assets have a useful life of more than one year.
- Knowing wherea company is allocating its capital and how it finances thoseinvestments iscritical information before making an investment decision.
- It's alsoimportant to know how the company plans to raise capital for its projects;whether the money comes from a new issuance of equity or financing frombanksorprivate equity firms.
Current Assets
Current assetsare assets that can be converted into cash within one fiscal year or one operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments. As a result, short-term assets are liquid, meaningthey can be readily converted into cash.
Examples of current assets include:
- Cash and cash equivalents,which might consist ofcertificates of deposit
- Marketable securities,such asequity ordebt securities
- Accounts receivable, or money owed to the company for selling their products and services to theircustomers
- Inventory
- Prepaid expenses
Fixed Assets
Fixed assetsare noncurrent assets that a company uses in itsproduction of goods and services that have a life ofmore than oneyear. Fixed assetsare recorded on the balance sheet and listed asproperty, plant, and equipment(PP&E). Fixed assets arelong-term assetsandare referred to as tangible assets, meaning they can be physically touched.
Examples of fixed assets include:
- Vehicles liketrucks
- Office furniture
- Machinery
- Buildings
- Land
Key Differences
Fixed assets undergo depreciation, which divides a company's cost for non-current assets to expense them over their useful lives. Depreciation helps a company avoid a majorloss when a company makes a fixed assetpurchase by spreading the cost out over many years. Current assets are not depreciated because of their short-term life.
Noncurrent assets (like fixed assets)cannot be liquidated readily to cash to meet short-term operational expenses or investments. Fixed assets have a useful life of over one year, while current assets are expected to be liquidated within one fiscal year or one operating cycle. Companies can rely on the sale of current assets if they quickly need cash, but they cannot with fixed assets.
For example, if the economy is in a downturn and a company is not making any profits but still needs to make a debt payment next month yet has no cash reserves to do so, it can sell its marketable securities within a few days and obtain cash. On the other hand, it would not be able to sell its factory within a few days to obtain cash as that process would take much longer.
Special Considerations
Capital investment is money investedin a company with the goal of advancing its commercial objectives.
Capital Investment andFixed Assets
Capital investment decisions are long-term funding decisions that involve capital assets such as fixed assets.Capital investments can come from many sources, including angel investors, banks, equity investors, and venture capital firms. Capital investments might include purchasesofequipment and machinery or a new manufacturing plant to expand a business. In short, capital investments for fixed assets mean acompany plans to use the assets for several years. These purchases are also known as capital expenditures.
Capital Investment andCurrentAssets
Althoughcapital investments are typically used for long-term assets, some companies use themto finance working capital. Current asset capital investmentdecisions are short-term funding decisions essential to a firm’s day-to-day operations.Current assets are essential to the ongoing operationof a companyto ensure it covers recurring expenses.
Capital investment decisionslook at many components, such as project cash flows, incremental cash flows, pro forma financial statements, operating cash flow, and asset replacement. The objective is to find the investment that yields the highest returnwhile ignoring anysunk costs.
Return on invested capital(ROIC) is a calculation used to assess a company's efficiency at allocating the capitalunder its control to profitable investments. Return on invested capitalgives a sense of how well a company is using its money to generate returns.
There are severalmethods used in determining how to allocate capital to one investment versus another, includingincremental analysis,whereby a companycan calculate the differences in cost between different investment options.
FAQs
No. Fixed assets and current assets are not the same. Current assets are short-term assets that contribute to a business's liquidity, meaning they can be converted into cash or cash equivalents. Fixed assets are acquired for long-term investment and are not expected to be converted into cash quickly.
What is the difference between a fixed asset and a current asset? ›
Current assets are short-term assets, which are held for less than a year, whereas fixed assets are typically long-term assets, held for more than a year.
What is an example of a fixed asset? ›
Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.
What is an example of a current asset? ›
Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. The Current Assets account is important because it demonstrates a company's short-term liquidity and ability to pay its short-term obligations.
Is a car a fixed asset or current asset? ›
Yes, a car is regarded as a fixed asset or capital asset as it is useful for the business in the long term. But, one point to note is that the car is subject to depreciation.
What is considered a fixed asset? ›
Fixed assets are tangible, long-lived assets used by a company in its operations, such as machinery, factories, tools, furniture and computers. They are listed in the noncurrent asset section on a company's balance sheet because their useful lives extend beyond one year.
What does my fixed assets mean? ›
Fixed assets are physical or tangible assets a company owns and uses in its business operations to provide services and goods to its customers and help drive income. These assets, which are often equipment or property, provide the owner with long-term financial benefits.
What are the three types of fixed assets? ›
Fixed assets are often referred to as property, plant, and equipment, or PPE—the three most common kinds of fixed assets. For example, the fixed assets of a frozen cookie dough manufacturer might include a corporate office (property), a cookie dough factory (plant), and machines that make cookie dough (equipment).
How to classify fixed assets? ›
Fixed assets are classified into two categories: real and personal property.
- Personal Property. Personal property encompasses all fixed assets that are not real property. ...
- Real Property. ...
- Capital Leases.
Fixed assets, also known as property, plant, and equipment (PP&E) and as capital assets, are tangible things that a company expects to use for more than one accounting period. Current assets, such as cash and inventory, are items that the company expects to use up or sell within a year.
A current asset, also known as a liquid asset, is any resource a company could use, turn into cash, or sell within a year. This includes cash in the bank, money that customers owe (accounts receivable), goods ready to be sold (inventory), and other investments that can be easily offloaded.
What is your current asset? ›
Current assets are the resources that a business owns and expects to use or sell within a year. Current assets are important to a business because by converting them to cash they allow it to pay its day-to-day operating expenses, bills and loan payments - its current liabilities.
Which should not be considered as a current asset? ›
Examples of noncurrent assets include long-term investments, land, property, plant, and equipment (PP&E), and trademarks.
What type of asset is a house? ›
Some consider real estate a type of financial asset, but it's also considered a physical asset. Physical assets are tangible objects, such as property, art or valuable heirlooms, that require upkeep to maintain or increase in value.
What is the difference between fixed and current assets? ›
Fixed assets and current assets are not the same. Current assets are short-term assets that contribute to a business's liquidity, meaning they can be converted into cash or cash equivalents. Fixed assets are acquired for long-term investment and are not expected to be converted into cash quickly.
Is furniture a fixed asset? ›
Yes, furniture is a fixed asset. Also read: Fixed Assets Vs Current Assets. Intangible Assets.
What is the difference between current assets and fixed assets in Quizlet? ›
Current assets can be converted into cash within one year, while fixed assets are more permanent and are usually held for a long time.
Is inventory a current asset or fixed asset? ›
Yes, inventory is considered a current asset. Current assets or short-term assets are accounts that track what a company owns and expects to use within a year. And since inventory is intended to be sold within 12 months, it's recorded as a current asset in the balance sheet.
What is the main difference between a fixed asset and a liquid asset? ›
Liquid assets, such as cash and marketable securities, can be converted into cash quickly, providing immediate funds to cover short-term financial needs. Conversely, fixed assets like buildings and machinery are designed for long-term use in a business's operations and are not easily converted into cash.
Is office supplies a current asset? ›
Office supplies, including corporate office supplies, are considered current assets until they are used. When consumables are exhausted, they are automatically converted into costs or expenses.
