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Do you want to manage the financial statement of your business and want to know the difference between fixed assets vs current assets?
The fundamental contrast between fixed assets vs current assets is that the liquidity of the assets, i.e. if they can be converted into cash within a period of one year, they are then considered to be current assets. When the asset is kept by the company for more than one financial year, we speak of fixed assets or non-current assets.
In accounting, we often come across the term assets, which refers to items or resources owned by the business that are believed to provide monetary benefit in the future in the form of cash flow. Assets are classified as fixed assets and current assets.
Before finding out more details about the dissimilarity between these two types of assets, let’s discover what are fixed assets and current assets in this article!
A fixed asset is a long-term asset or an asset held by the company for a period longer than that of an accounting period such as property, plant, …. Concretely, from its creation, a company incurs purchases in order to acquire the goods which constitute its heritage.
These assets are said to be "fixed" when they are intended for use by the company and to create long-term value. The fixed assets are found at the top of the accounting balance sheet, a document that gives an account of the financial situation of the company, in the “Assets” part.
Intangible assets are non-material assets. They represent a positive economic value for the company which owns them and which can exploit them for its own activity or on behalf of another.
Examples of intangible assets: Commercial property, patents, software, brands, websites, research & development costs, etc.
Tangible fixed assets are physical assets. They are intended for long-term use by the company: either for the production necessary for its activity, or for the supply of goods or services, or for rental to third parties.
Examples of tangible fixed assets: hardware, vehicles, industrial equipment and machinery, furniture, land, constructions, premises, etc.
Fixed assets relate to monetary assets, which are intended to remain in the company over the long term.
Examples of financial assets: equity securities of other companies, actions, business sureties, loans to third parties, etc.
Current assets, such as cash and inventory, are things that are not meant to last in the business; they are more “liquid” and can be readily converted into cash. Current assets are at the bottom of the balance sheet. The company can rely on the current assets when they need cash.
Current assets include all the assets that can be mobilized in the short term life, that is to say, all the balance sheet items that are expected to be monetized at maturity of less than one year. We say "short term" since all these elements of the current asset are consumed during the operating cycle of the company. They are not depreciated because of their short-term life.
These assets are necessary for the continued operation of the business and include:
The data used to calculate a current asset can be found in the balance sheet. This is the lower part of the asset, made up of the following elements:
Current assets = stock + trade receivables
The dissimilarity between fixed assets and current assets can be clearly established for the following reasons:
To close the discussion, we can say that it is not about the type of asset, but about the object of the acquisition of the asset, that is to say, that if the asset is held by the business for resale then it is a current asset, while if the asset is acquired to help the business in its operations for a long time then it is called a fixed asset.
Suppose there is a company that deals with calculators, then it is the company's stock and therefore considered a current asset. On the other hand, if there is a grocery store, in which the calculator is used by the merchant to calculate the total amount of the invoice, then it is a capital asset of the business.