What's the difference between fixed assets vs current assets?
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!
What are fixed assets?
Definition
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.
The different types of fixed assets
Intangible fixed assets
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
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.
Financial fixed assets
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.
What are current assets?
Definition
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:
- stocks and work in progress;
- receivables: money owed to the company, whether due to customers or suppliers, for example;
- availability, or cash: money available in the company's bank accounts, but also marketable securities (VMP) for example;
- prepaid expenses.
How to calculate the current assets?
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:
- inventories of goods, raw materials, intermediate products, finished products, work in progress, and services;
- trade receivables (rights that a company has over third parties by virtue of a sale for which it has consented to specific payment)
Current assets = stock + trade receivables
Fixed assets vs current assets: The key difference
The dissimilarity between fixed assets and current assets can be clearly established for the following reasons:
- Non-current assets that the entity holds for the purpose of continuing to be used, to generate income, are called fixed assets. Current assets are defined as items that are held for resale by the company and also for a maximum period of one year.
- For all companies, converting a fixed asset to cash cannot be done easily. On the contrary, current assets are immediately converted into cash.
- Fixed assets are used by the business to produce goods and services. Thus, they are detained for over a year. Conversely, companies kept current assets, in the form of cash or in a form easily convertible into cash. Therefore, these assets are held for less than a year.
- Fixed assets are valued at net book value, the original cost of the asset less depreciation. In contrast, the valuation of a current asset is at cost or market value, whichever is lower.
- As the investment in fixed assets requires huge capital investments, long-term funds are used for its acquisition. Unlike current assets, which require short-term funding for its acquisition.
- Fixed assets cannot be pledged while current assets can be pledged, as collateral for granting loans.
- The fixed charge is created on fixed assets, while current assets are subject to a floating charge.
- When the company sells current assets, the profit made or loss incurred is of a commercial nature. On the other hand, the sale of fixed assets will result in a profit or a capital loss for the business.
- A revaluation reserve is created when there is an appreciation in the value of the asset, while no such reserve is created in the event of an appreciation in the value of the current asset.
Key takeaways
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.