What is a Fixed Asset?
Fixed assets can be defined as substantial pieces of property 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 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 that are not easily transformed into hard cash. The meaning of current assets will be discussed later, on this page. The various kinds of noncurrent assets cover:
Generally, a fixed asset is purchased for the supply and manufacturing of commodities and services. Production may be done for rental purposes, third parties or 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 the 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 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 a 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:
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.
Inventories comprise raw products, materials and finished goods and fall under the category of current assets. 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.
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 that 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 to utilise continuously for income are termed as fixed assets. On the other hand, the items that can be sold within 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 capital are utilised for obtaining it. The latter demands short duration investments for acquiring those assets.
Current assets can be kept as mortgages as collateral for availing loans, while fixed holdings cannot be mortgaged.
Current holdings are subjected to a floating charge, whereas fixed assets denote fixed costs.
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 an 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 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 on your smartphone to take your notes with you.
The key difference between these two types of assets which are fixed assets and current assets is how liquid the assets are. It means if they can be converted into cash within one year, then they are termed as current assets. While when the asset is kept by the firm for the period of more than one accounting year, then it is known as fixed assets. It is also termed a non-current asset.
In accounting, we often deal with assets. Assets are those which indicate those items or resources owned by the firm. It is supposed to provide monetary benefits in the future. Benefits can be in the form of cash flows. Assets are classified into two categories. Which are fixed assets and current assets.
So, let’s read here for a better understanding of the topic of fixed and current assets.
Ans. Fixed Assets are the type of non-current assets. These assets are owned by the company with the aim of productive use by the firm rather. Companies do not own them with the objective of resale. They are expected to provide economic benefits to the company for more than one accounting year. These assets are held by the company for carrying out business operations. So On the balance sheet, fixed assets are reported at their net book value. It is the purchase price less depreciation or amortisation as the case may be.
It consists of tangible fixed assets, intangible fixed assets, capital work in progress and intangible assets under development. Its examples are land, building, plant, machinery, computer, vehicles, leasehold property, furniture, fixtures, software, copyright, patent, goodwill, etc.
Ans. An asset is said to be a current asset when it is considered to be sold within one year or the company’s normal operating cycle. Companies generally held the current asset in the form of cash. Also, it can be their conversion into cash or for using it in providing goods and services.
These are generally acquired for trading. It includes current investments, inventory, short-term loans and advances etc.
FAQs on Fixed Assets and Current Assets
1. What are Fixed Assets and Current Assets?
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 kinds of assets that can be transformed into cash within a financial year.
2. Mention some Primary Assets.
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 for example.
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 twelve months. An example of a fixed and current asset is office furniture and inventory, respectively.
4. Give a few examples of Current Assets.
Few examples of current assets are cash, marketable securities, accounts receivable, etc.
5. Compare between Fixed Assets and Current Assets?
The difference between fixed assets and current assets are in the following ways :
Fixed assets are the non-current assets that any company uses to continue use and to generate income. Current assets are the items that a company has for resale. These are held for a maximum period of one year.
The conversion of assets into cash is not a simple task. While the current assets can be easily converted into cash.
Fixed assets are generally used by the company to create goods and services. Thus they are held for more than one year. The company keeps the current assets in such a form that can be easily converted into cash. So We can also say that these assets are held for less than one year.
Fixed assets are generally valued at net book value. Which is generally the original cost of the asset less depreciation.
Huge capital investment is needed for the fixed assets. So the long term funds are utilised for its acquisition. Other than the current assets, that requires short-term financing for its acquisition.
6. What are the characteristics of fixed assets that make them different from current assets?
Fixed assets are the long term assets that are acquired by the entity to continue use, to generate income.
Current assets are those resources which a company owns for trading. Companies do not hold them for longer than one year.
Fixed assets are not easily convertible into cash. While current assets can be readily changed into cash.
These holding periods are generally more than a year while fixed assets have less than a year.
Long term funds are used for financing the fixed assets.
While for current assets short term funds are used for financing current assets.
Sale of asset
The sale of fixed assets will result in capital profit or loss.
While for current assets it Will result in revenue profit or loss.
It is Created for fixed assets when the value is appreciated. While not created at all.