Fixed Assets and Current Assets

What is a Fixed Asset?

Fixed assets can be defined as substantial pieces of properties or equipment owned by a company. These tangible things are used to accumulate income. However, fixed assets cannot be converted into liquid cash and cannot be consumed within one year.

Fixed assets generally appear as ‘Property’, ‘Plant’, and ‘Equipment’ (PP&E) on a balance sheet of an enterprise. They are also termed as capital assets.

How does Fixed Asset Work?

The balance sheet of a company contains statements of its assets, shareholders’ equity and liabilities. Assets are commonly divided into two subparts – noncurrent assets and current assets. The difference between them lies in their usage. Noncurrent assets are properties and assets of a business which are not easily transformed into hard cash. Meaning of current assets will be discussed later, on this page. The various kinds of noncurrent assets cover:

  • Fixed assets

  • Intangible assets

  • Long-duration investments

  • Deferred expenses

Generally, a fixed asset is purchased for supply and manufacturing of commodities and services. Production may be done for rental purposes, third parties or for a company’s personal use.

The phrase fixed asset means that these holdings are not supposed to be utilised within the financial year. Fixed assets have a materialistic form and are shown on a balance sheet in the form of PP&E.

Advantages of Fixed Assets

Details and particulars of a business’s holdings help in creating accurate accounting reports, valuations of trade and extensive financial analysis. Investors and beneficiaries make use of these reports to decide an organisation’s economic status. Moreover, the reports are also necessary to determine whether to lend money or purchase shares in that company.

An enterprise may use different trusted methods to record, depreciate and dispose of its assets. Hence, financial analysts are required to learn about the notes on a company’s account statements to understand how the figures are calculated.

Fixed assets are specifically vital to industries which demand a considerable sum of money. An example may be manufacturing, which needs expenditure on PP&E. However, if a business shows continuous negative total cash flow due to acquisition of fixed holdings, this is a reliable indication that the enterprise is expanding or in an investing position.

Some Common Examples of Fixed Assets

Common types of fixed assets can be constructions, computer devices, software, real estate properties, machine equipment, furniture and vehicles. For instance, an organisation builds a car parking area for its usage, that parking space is considered a fixed asset.

Keep it in mind that a fixed asset does not mean it has to be an immovable property in all senses of the term. Some fixed holdings like furniture and computer hardware can be moved from one place to another.

Now, let’s move on to current assets.

What is a Current Asset?

Current assets of an enterprise are all the holdings that can be easily sold, utilised and consumed and converted into cash through proper trade operations in one fiscal year. This type of asset is visible on an organisation’s balance sheet. Balance sheets are essential accounts statements that are necessary to be furnished every year.

Comprehending Current Assets

One major fixed and current assets difference is that fixed holdings cannot be feasibly converted into cash in less than a year. Whereas current holdings are vital for businesses as they can be utilised to meet regular economic demands and existing operational outlays. Seeing that the term is described as a dollar worth of all holdings and resources that can be conveniently turned into hard cash within a short span, it determines an enterprise’s liquid holdings.

Nevertheless, it must be noted that only the eligible assets that have the capability of being turned into liquid money within one-year duration are included.

For example, a strong perception prevails that many fast-moving consumer goods manufactured by a company can be effortlessly sold over the coming year. Current assets include inventories, but selling land properties and large machines can be difficult. So machines and pieces of land are excluded from current holdings.

The types of current assets ranging from gallons of crude oil, manufactured products, progressing inventories, raw goods or foreign money is dependent on the type of trade and commodities it produces.

Do It Yourself

Classify the following between fixed and current assets:

(a)machinery (b)inventory (c)bills receivables (d)insurance (e)copyright

Important Constituents of Current Assets

Inclusions of current holdings are hard cash, equivalents of cash and liquid expenses in saleable securities like short duration treasury bills and bonds. Furthermore, the following components also fall under current assets:

  1. Accounts Receivable

Accounts receivables are the money of an enterprise that is due for manufacturing services and products. This money is yet to be paid by the consumers and is considered as a current holding, provided that it is expected to be paid within one year. But, if a business is making a profit by presenting long term credit to its customers, then a fraction of account receivables are not granted as current assets.

  1. Inventory

Inventories comprise raw products, materials and finished goods and fall under the category of current asset. However, one thing that needs to be noticed is inflation of inventory can be made using various accounting techniques, and sometimes it may not be quickly convertible in liquid cash compared to other current holdings. This depends on the goods and the type of industry.

  1. Prepaid Outlays

These are advance expenses made by an organisation with regards to products and services, and they are to be secured in near future. Prepaid outlays cannot be turned into liquid money as they are payments which have already been done. These elements unbound the capital amount, which is required for other necessities. Prepaid outlays can be payments made to insurance organisations or contractors.

The current holdings of a company are listed according to liquidity order. This means that the components which can be easily converted into cash are given higher ranks. Therefore, the formula for evaluating current assets is an aggregate of all feasible cash convertible holdings. For example:

Current Assets = C + CE + I + AR + MS + PE + OLA

Where: C= Cash, CE= Cash Equivalents, I= Inventory, AR= Accounts Receivables, MS= Marketable Securities, PE= Prepaid Expenses and OLA= Other Liquid Assets

Now, let’s understand the difference between fixed assets and current assets.

Important Fixed Assets and Current Assets Difference

  • The noncurrent assets owned by a company for the purpose of utilising it continuously for income are termed as fixed assets. On the other hand, the items that can be sold within a span of twelve months are known as current assets.

  • Transforming a fixed asset into real cash is difficult. Whereas current holdings can be effortlessly converted into real cash.

  • Fixed holdings are utilised by an enterprise to generate products and services. They are kept for more than a year. On the contrary, current assets like cash and cash equivalents are kept by a company and can be easily obtained as cash. This is why current assets are detained for less than twelve months.

  • The value of fixed assets is the complete value, which means the actual price without any depreciation. Conversely, the valuation of current holdings is the value or market price, whichever is minimum.

  • Another difference between fixed and current assets is that the former requires a lump sum amount of investment, so long-term capitals are utilised for obtaining it. The latter demands short duration investments for acquiring those assets.

  • Current assets can be kept as mortgage as collaterals for availing loans, while fixed holdings cannot be mortgaged.

  • Current holdings are subjected to floating charge, whereas fixed assets denotes fixed cost.

  • When an organisation sells its fixed assets, the loss suffered or profit earned is on that company’s capital. On the other, when current holdings are sold, loss and profit experiences are of earnings nature.

  • When there is an appreciation in the price of a fixed asset, a revaluation reserve is formed. But, in the case of appreciation of worth related to current assets, no revaluation reserve is created.

If a holding is kept by a company for selling purposes, it is considered as a current asset. Conversely, if an asset is obtained to support a firm for its operations, it is a fixed asset.

For more understanding about distinguishing between current assets and fixed assets, go through the study materials available on our website. You can also install Vedantu’s app in your smartphone to take your notes with you.

FAQ (Frequently Asked Questions)

1. What are Fixed Assets and Current Assets?

Ans. The assets which cannot be easily converted into cash are known as fixed assets. On the other hand, current assets can be defined as cash and various different kinds of assets that can be transformed into cash within a financial year.

2. Mention Some Primary Assets.

Ans. Some primary kinds of assets include – inventories, cash and equivalents of cash, investments, vehicles, stock, property, etc.

3. Write the Major Difference Between Fixed Assets and Current Assets With Example.

Ans. The major difference between fixed and current assets is that fixed assets cannot be easily converted into cash, and current assets can be turned into cash within a duration of twelve months. An example of a fixed and current asset is office furniture and inventory, respectively.

4. Give a Few Examples of Current Assets.

Ans. Few examples of current assets are cash money, marketable securities, accounts receivable, etc.