Usually, organizations have different types of assets. They may include property, plants, inventories, etc. The assets may have different natures and their properties may be different too.
According to analysts, there is one fundamental difference among the assets depending on which the assets can be divided into two sections −
The difference lies in the assets’ ability to get converted into cash.
Termed also as Property, Plant, and Equipment (PP& E) and as capital assets, fixed assets are tangible things of a company that can be used for more than one accounting period. In India, fixed assets are assets that have a utility of more than one year. In other words, the assets that are fixed have been used for more than one year by the firm owning them.
Sometimes, fixed assets are called tangible assets because they have a physical form. Unlike intangible assets, such as copyright, trademarks, and logos, fixed assets have a touchable and repairable existence. Some of the most common fixed assets include buildings, lands, machinery, equipment, furniture, vehicles, and personal computers.
Fixed assets usually has a limited life. They grow old, wear out, and ultimately become out of order. Businesses, therefore, begin the countdown of fixed assets from the day they start using them. To do so, firms take the help of accounting to find the meaningful measure of the lifetime of the fixed assets. Depreciation is carried out for both accounting and tax deduction reasons. The asset becomes an impaired asset when its market value goes down below the market price of the asset.
Fixed assets are shown under property, plant, and equipment (PP&E) holdings on the company's balance sheet. Fixed assets also appear in the cash flow statements of the business during the initial purchase and when the asset is sold or depreciated.
Noncurrent assets, including fixed assets, in the income statements, are the ones with benefits that last more than one year from the reporting date.
Although many fixed assets are noncurrent in nature, there are some fixed assets that are considered non-noncurrent and permanently fixed.
For example, if personal computers are used for more than a year to produce goods in an organization, they will be considered both noncurrent and fixed. The same will be true for the vehicles used by the company for the purposes of its operations.
However, PP&E or property, plant, and equipment costs are usually reported on financial statements as a net of cumulative depreciation.
Current assets are the assets that can be converted to liquid assets or cash within one accounting period. Unlike fixed assets that have a lifecycle of more than one year, current accounts are usually used up within a year’s time.
The major forms of current accounts that are common include −
Irrespective of where the inventory is placed include–raw materials, works in progress, or finished good–inventory is also considered a current asset. The company usually expects to sell inventory within a year’s time and hence they are considered current assets. Current assets help in the day-to-day operations of the businesses.
Accounts receivable is an inflow of cash within one accounting period. So, it is also considered a current asset. Sometimes, current assets may be listed as liquid assets or current accounts.
| Fixed Asset | Current Asset |
|---|---|
Fixed assets are the noncurrent assets owned by a company to utilize continuously for income. It has a life of more than one year. | The assets that can be sold within twelve months are known as current assets. These assets are used for the day-to-day operations of the firm. |
As the fixed assets are long-term in nature, converting them to real cash is a long-term and difficult task. | Current assets are meant for a short-term life. So, they can be converted to cash effortlessly. |
Fixed assets are generally used by an enterprise to create products and services. That is why they are kept for more than a year. | Cash and cash equivalents that are considered current assets are kept by a company and can be easily obtained as cash. This is a reason why current assets are used for less than twelve months. |
The starting value of fixed assets is the actual value of the asset. This means that the assets have an actual price without any depreciation. | The original valuation of current holdings is the value of it or the market price, whichever is the minimum. |
The fixed asset requires a lump sum amount of investment for ownership at the outset. That is why long-term capital is utilized for obtaining it. | Current holdings demand short-duration investments for acquiring those assets. |
The fixed assets are permanent holdings that cannot be mortgaged. | Current assets can be converted to cash at any time. So, they can be kept as mortgages as collateral for availing loans |
The fixed assets usually denote fixed costs. | Current holdings are subject to a floating charge because of changes in the price of assets in the market. |
If fixed assets are sold, the effect occurs on the company’s capital. That means, the loss suffered or profit earned is on that company’s capital. | The loss and profit experiences are of an earnings nature when current assets are sold. |
In the case of an appreciation in the price of a fixed asset, a new revaluation reserve is formed. | In the case of appreciation of current assets, no revaluation reserve is created. |
Usually, fixed assets are owned to support the operations of the company. So, when an asset is obtained to support a firm for its operations, it is a fixed asset. | Current assets are not owned to support organizations. So, if a holding is kept by a company for selling purposes, it is considered a current asset. |
When an asset is kept by the firm for a period of more than one accounting year, then it is known as fixed assets. It is also known as a non-current asset. | If the assets can be converted into cash within one year, then they are termed current assets. |
It is important to know the differences between fixed and current assets. Although current assets are handy in nature, fixed assets are considered more important for organizations. This is so because fixed assets are the backbone of an organization and all important operations are done using them. That is why fixed assets get more preference than current assets although both are important for a firm.
Q1. What is the difference between fixed and current assets in terms of owning them?
Ans. Usually, fixed assets are owned to support the operations of the company. So, when an asset is owned to support a firm in its operations, it is a fixed asset. Current assets are not owned to support organizations. So, if a holding is only for selling purposes, it is considered a current asset.
Q2. Why are current assets allowed to be mortgages to avail loans?
Ans. Unlike fixed assets, the value of current assets can be converted and availed in cash with ease in the case of current assets. So, creditors can avail of the return from current asset mortgages earlier and more easily in the case of current asset mortgages. That is why current assets are mortgaged for loans.
Q3. Which type of assets are used for the day-to-day operations of firms?
Ans. Current assets are used for the day-to-day operations of firms.
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