Current Assets vs Fixed AssetsDifferences & Comparison

Written By:
Adiste Mae

Any type of business is going to require some sort of asset(s) in its lifetime for one purpose or another.

Assets are categorized as either current or long term based on how long they will be held by the company.

The two most common types of assets on the balance sheet are current assets and fixed assets (also known as long term assets).

The balance sheet statement of a company is composed of the business’ assets, liabilities and its shareholder’s equity.

Assets are divided into two categories and can either be considered a current asset or as a non-current asset (fixed asset) with the differences being dependent on the asset’s useful life.

While both current and long term assets fall under the same category on the balance sheet, there are some key differences to know about them.

Current Assets

Cash and cash equivalents, prepaid expenses, inventory and accounts receivables are examples of current assets.

Due to the short term nature of a current asset, there is no depreciation accounted for it; unlike a fixed asset that undergoes the process of depreciation.

From the definition above, we can gather that if an asset can be reliably sold, traded, used, or liquidated within a year (usually through operations), we classify it as a current asset.

In other words, if it’s a liquid asset (an asset that can be easily converted to cash), it is a current asset.

Of course, with cash being the most liquid asset (unless restricted), it is a prime example of a current asset.

Other examples of current assets are inventory, accounts receivable, short-term investments, prepaid expenses, etc.

While there are assets that are acquired for capitalization purposes (such as properties, land, building), a current asset’s main purpose is to fund the day-to-day operations of a company.

Current assets are important for many different reasons and here are some examples.

• Cash is needed to finance operations.
• Inventory represents a company’s goods for sale.
• Accounts receivable is acquired through non-cash sales.
• Current assets are important for a company as they keep the company’s operations flowing.

Fixed Assets

A fixed asset is an asset that a business has bought in order to use as part of its production process when it comes to making and distributing the goods and services the business offers.

A fixed asset is used over the long term which means that these assets are used for a period of more than 12 months.

Examples of fixed assets include the property, plant and equipment (PPE or PP&E) figures you see recorded on the company’s financial statement, particularly in its balance sheet.

A fixed asset is also known as a tangible asset since fixed assets tend to be assets you can see, feel or interact with physically.

Below is a short list on items that are considered a fixed asset:

•       Land
•       Building
•       Machinery
•       Office furniture
•       Company vehicles such as company trucks and cars

It should be noted that a fixed asset is not liquid, which means that it cannot be easily sold to be readily converted into cash.

A fixed asset is also not fully consumed by a company within the year that it was purchased.

In certain cases, a fixed asset is not sold or consumed at all by the business and instead, it is used as a means to produce the services and goods the business offers to its customers and its target market.

A fixed asset that is tangible goes through a process called depreciation as time goes on.

Depreciation is what will reduce the cost of the fixed asset that has been initially recorded.

In most cases, tangible assets such as equipment, machinery and even buildings go through depreciation.

Despite it being true that tangible assets do get depreciated, land which is also a tangible asset, does not depreciate since the usage of land to put a building on for example does not deplete the land’s value over time not unless the land contains natural resources which can diminish when repeatedly used over a certain period of time.

Current Assets vs Fixed Assets: Key Differences

Because of their short life span of up to a year, current assets are not depreciated.

Fixed assets on the other hand are depreciated to help the company avoid any major loss when the initial purchase is made.

Depreciation simply spreads the cost of the fixed asset over many years, making it easier on the company.

Furthermore, fixed assets can not be easily converted to cash like current assets can.

For example, if a company is unable to make a profit to pay its debts, it can quickly sell its marketable securities in exchange for cash to meet its obligations.

Fixed assets such as buildings or machinery are much harder to sell and convert to cash and are often needed to generate p[profit in the first place.

The key differences to know about current and fixed assets is their life span (less than 1 year or more than 1 year), how quickly they can be converted to cash, and whether the asset will be depreciated or not.

Key Takeways

• Assets are divided into two categories and can either be considered a current asset or as a non-current asset (fixed assset) with the differences being dependent on the asset’s useful life.
• Current assets have a life span of less than one year and can easily be converted to cash.
• Due to the short term nature of a current asset, there is no depreciation accounted for it.
• A fixed asset is used over the long term which means that these assets are used for a period of more than 12 months.
• In most cases, tangible long term assets such as equipment, machinery and even buildings go through depreciation.