Fixed Asset vs Current Asset: Key Differences Explained
A fixed asset is a long-term tangible resource owned by a business, such as machinery, vehicles, or buildings, and is not intended for quick sale. The concept of fixed asset is crucial for understanding business financial statements, preparing for school, board, and competitive exams, and making informed business decisions. At Vedantu, we simplify the fixed asset concept for easy learning and exam success.
| Type of Asset | Definition | Examples | Nature |
|---|---|---|---|
| Fixed Asset | Long-term, tangible, used in business operations | Land, machinery, buildings, vehicles | Non-current (used for more than one year) |
| Current Asset | Short-term, easily convertible to cash | Cash, inventory, accounts receivable | Current (used/sold within a year) |
What Is a Fixed Asset?
A fixed asset is a non-current, tangible asset used by a company to generate income over the long term. Common fixed assets include office equipment, land, company vehicles, and buildings. These assets support business operations rather than being sold as inventory.
Fixed Asset Examples
- Company trucks used for deliveries
- Office furniture and computers
- Manufacturing machinery
- Company-owned buildings and warehouses
- Land owned by the business
Fixed Asset vs Current Asset
Understanding the difference between fixed assets and current assets is essential for exam questions and proper financial statement classifications. Fixed assets are for long-term use, while current assets are expected to be converted to cash or sold within a year. Use this knowledge for balance sheet problems and business analysis. Learn more at Fixed Assets and Current Assets.
Accounting for Fixed Assets
Fixed assets are shown on the balance sheet under non-current assets. Their value is recorded at acquisition cost, including expenses like shipping and installation. Over time, a portion of their cost (except for land) is allocated as depreciation. This accounting treatment helps represent the actual worth of assets each year. Explore more at Balance Sheet and Final Accounts.
Depreciation of Fixed Assets
Depreciation is the method of spreading the cost of a fixed asset over its useful life. This reduction helps match the expense with the revenue the asset generates. Common methods include the straight-line and written-down value methods. Land is an exception—it is a fixed asset but does not depreciate due to its infinite life. For more, see Methods of Depreciation and Accounting Concept of Depreciation.
| Asset Type | Depreciable? |
|---|---|
| Buildings | Yes |
| Machinery | Yes |
| Vehicles | Yes |
| Land | No |
Acquisition and Disposal of Fixed Assets
When a business acquires a fixed asset, it records its cost on the balance sheet. If an asset is sold or discarded, the difference between the sale value and its book value appears as a profit or loss in accounts. This is an important area for practical questions and exams. For details, visit Profit or Loss on Disposal of Asset.
Real-World Examples of Fixed Assets
Fixed assets play a vital role in businesses:
- A bakery’s oven and delivery vans are fixed assets.
- A school’s building and classroom furniture are fixed assets.
- Delivery trucks owned by a courier company are fixed assets, but personal vehicles used by employees are not.
- Buying small supplies (like rock salt for parking) is treated as an expense, not a fixed asset.
Why Are Fixed Assets Important?
Knowing about fixed assets helps students answer exam questions on asset classification, balance sheet preparation, depreciation, and company analysis. For investors and analysts, fixed asset data aids financial reporting, valuation, and understanding which firms are capital-intensive. Industries like manufacturing and logistics rely on fixed assets to operate and grow.
Relation to Other Asset Types
Fixed assets are a type of non-current asset, along with long-term investments and intangibles (like goodwill and copyrights). While intangibles lack physical presence, they may be used long-term. For greater depth, see Non-Current Assets and Classification of Assets and Liabilities.
Summary
A fixed asset is a long-term tangible asset, such as land, machinery, or vehicles, used in business operations and not meant for immediate sale. Understanding fixed assets is key for school and competitive exams, financial reports, and daily business decisions. At Vedantu, we make learning about fixed assets clear and accessible for every student’s success.
FAQs on What Is a Fixed Asset?
1. What is a fixed asset in accounting?
A fixed asset is a long-term tangible resource that a business owns and uses in its operations, not for resale. Examples include property, plant, and equipment (PPE) such as buildings, machinery, and vehicles. These assets are recorded on the balance sheet and contribute to the business's long-term operational capacity.
2. What are some common examples of fixed assets?
Common fixed asset examples include:
- Buildings
- Land
- Machinery
- Vehicles
- Office equipment (computers, furniture)
- Production equipment
3. Is a laptop or a computer considered a fixed asset?
Yes, a laptop or computer can be a fixed asset, depending on its cost and intended use. If the computer is used for business operations and its cost is significant enough to be capitalized, it's likely classified as a fixed asset. Otherwise, it might be treated as an expense.
4. Is a vehicle a fixed asset for a company?
Yes, a vehicle used for business purposes is generally considered a fixed asset. It's a tangible asset with a useful life exceeding one year, used to generate revenue, and its cost is material enough for capitalization.
5. What is a fixed asset register used for?
A fixed asset register is a detailed record of all a company's fixed assets. It tracks details like the asset's description, purchase date, cost, accumulated depreciation, and current book value. This register is crucial for accounting, tax purposes, and internal management of assets.
6. How is depreciation calculated on fixed assets?
Depreciation is the systematic allocation of an asset's cost over its useful life. Several methods exist, including straight-line, declining balance, and units of production. The choice of method depends on the asset and company policy. Depreciation is not applied to land.
7. What is the difference between fixed assets and current assets?
Fixed assets are long-term, tangible resources used in operations, while current assets are short-term assets expected to be converted into cash within a year (e.g., cash, accounts receivable, inventory). Fixed assets appear on the balance sheet under non-current assets.
8. What is defined as a fixed asset?
A fixed asset is a tangible, long-term resource owned by a business and used for generating income, not for resale. It's a non-current asset with a useful life exceeding one year and is recorded on the balance sheet at its historical cost less accumulated depreciation.
9. What is an example of a fixed asset?
A common example of a fixed asset is a company vehicle. It's a tangible asset used for business operations, has a useful life of several years, and is not intended for immediate sale. Other examples include buildings, machinery, and office equipment.
10. What is a fixed asset for tax purposes?
For tax purposes, a fixed asset is a tangible asset used in a business that has a useful life exceeding one year. Tax laws often dictate how depreciation is calculated for fixed assets and how they are reported on tax returns. Specific rules vary depending on jurisdiction.
11. Can intangible assets like software ever be classified as fixed assets?
While typically tangible, some intangible assets, like specialized software with a long useful life and significant cost, can be classified as fixed assets. They are then recorded on the balance sheet and depreciated accordingly.
12. Why is land a non-depreciable fixed asset?
Land is considered to have an indefinite useful life, unlike other fixed assets which eventually wear out or become obsolete. Therefore, it is not subject to depreciation under generally accepted accounting principles.
