What is the difference between current assets and fixed assets?

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by mandy , in category: Taxation and Accounting , a year ago

What is the difference between current assets and fixed assets?

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1 answer

Member

by jaron , 10 months ago

@mandy 

The main difference between current assets and fixed assets lies in their nature and usage within a business.

  1. Definition:
  • Current Assets: These are assets that are expected to be converted into cash or used up within one year or within the normal operating cycle of a business. They include cash, cash equivalents, accounts receivable, inventory, and short-term investments.
  • Fixed Assets: These are long-term assets that are not easily convertible into cash and have a useful life of more than one year. Fixed assets are tangible assets such as land, buildings, machinery, equipment, vehicles, and intangible assets such as patents, trademarks, and copyrights.
  1. Timeframe:
  • Current Assets: Current assets are short-term in nature since they are expected to be used up or converted into cash within one year or the operating cycle.
  • Fixed Assets: Fixed assets are long-term assets as they are expected to be used over multiple years, usually exceeding the operating cycle of a business.
  1. Liquidity:
  • Current Assets: Current assets are considered to be highly liquid, meaning they can be easily converted into cash in the short term. They are readily available to meet day-to-day operational expenses.
  • Fixed Assets: Fixed assets are relatively illiquid as they are not easily convertible into cash. They are used for the production of goods or provision of services and are considered long-term investments that yield benefits over time.
  1. Usage:
  • Current Assets: Current assets are primarily used in the day-to-day operations of a business. They help manage short-term obligations, support sales, and maintain the continuity of business operations.
  • Fixed Assets: Fixed assets are utilized to generate revenue and support long-term growth. They contribute to the production process, expansion strategies, and provide the necessary infrastructure for business operations.
  1. Valuation:
  • Current Assets: Current assets are usually valued at their market value or lower of cost or net realizable value.
  • Fixed Assets: Fixed assets are recorded at their historical cost (initial cost of acquisition) and are subsequently depreciated over their useful lives or amortized in the case of intangible assets.


In summary, current assets are short-term assets used in daily operations, while fixed assets are long-term assets meant to generate revenue and support business growth. Current assets are highly liquid, convertible, and focused on short-term obligations, whereas fixed assets are illiquid, non-convertible, and have a longer useful life.