Assets are essential business resources critical for generating revenue, increasing business value, and contributing to the overall operations of your business. Each type has its own characteristics and role within your business.
The two main asset types are fixed assets and current assets. And the main difference between them is liquidity. How quickly can an asset be exchanged for cash? If it takes more than 12 months to convert the asset into money, it’s deemed a fixed asset. If it can happen within 12 months or one operating cycle, it’s a current asset.
Efficient asset management is essential, as errors in the asset management life cycle can cause reporting inaccuracies. In addition, unkept assets will be inefficient in generating revenue. Easy-to-use tools like BlueTally help with asset management accuracy; it lets you know the real-time status of your assets and enables you to keep them in top-notch condition.
Fixed Asset vs Current Asset: Overview
Fixed and current assets must be categorized for a clear picture of the business cash flow. One of their stand-out differences is how long a company holds them. Before we delve in, here is a quick high-level overview of how they differ.
- Fixed assets are long-term, with a useful life of more than one year.
- Fixed assets are tangible high-value items that can’t be sold quickly.
- A fixed asset will depreciate over its life cycle due to wear and tear, reducing its value. Examples include IT equipment, buildings, and vehicles.
- Fixed assets form a significant part of the balance sheet and are disclosed under the “Noncurrent assets” section.
- Current assets are short-term assets typically sold or used up within one year.
- Examples of current assets include money in the bank or raw materials like silver or cotton used to manufacture products.
- Current assets convert into cash quickly to pay for current liabilities like bills and daily operating expenses.
- Current assets are listed beneath the “Current Assets” section of the balance sheet.
What Is a Fixed Asset?
A fixed asset is a physical item or property purchased by a company with a useful life beyond one year. Some of the most common fixed assets include:
- Machinery and equipment
- Computer hardware
- Office furniture and fixtures
Fixed assets are non-current, meaning they aren’t meant to be sold or depleted by the business and can’t be converted to cash readily. They are usually used to support business operations, or as a way to generate income..
The life cycle of a fixed physical asset reflects its use and spent value through depreciation. The reduced value of depreciating fixed assets is reflected on the balance sheet. Most physical assets like equipment and buildings depreciate over time, through everyday use causing wear and tear, or through environmental exposure.
Advantages of Fixed Assets
- They support business growth – A fixed asset’s primary purpose is to help the business generate revenue.
- They increase the company’s net worth – This can also help your company secure extra funding from investors, as you’ll seem like a safe bet.
- It influences financial statements – The depreciation of a fixed asset is included on the income statement and reduces the net income. For instance, if machinery is purchased for $2,000, has a useful life of 20 years, and a residual value of $0 at the end of its life cycle, an annual depreciation cost of $100 would be recorded on the income statement.
- Fixed assets do not always depreciate – Some PP&E assets hold their value or increase in value. Property is an example of a fixed asset that can either hold value or appreciate. However, this depends on several factors, including location, size, when it was purchased, and its condition.
Disadvantages of Fixed Assets
- Fixed assets require a significant upfront investment – PP&E purchases can set small businesses back financially. The long-term return on investment should outweigh the initial cost.
What Is a Current Asset?
On the other hand, current assets are at the opposite end of the spectrum. A current asset can be conveniently converted into cash, sold, or exhausted through a typical operating cycle. A standard operating cycle usually represents twelve months, though this period could be longer for some assets. For example, wineries handle their stock as current assets.
Current assets, also called current accounts, are the first assets addressed in a company’s balance sheet. Management is keen to know the value of their current assets since it’s essentially the cash they need to pay for day-to-day operations without sourcing additional funds.
If a business experiences problems paying for short-term obligations like bank loans or lease payments, it could liquidate its current assets to help clear the debt. In addition, creditors and investors are keen to see a business’s ability to acquire cash quickly to determine their ability to fulfill repayments.
Businesses within different sectors and industries will often possess current assets. Current assets typically fall into the following categories:l
- Cash and cash equivalent: money markets, cash accounts, and certificate of deposit
- Marketable securities: stocks or bonds sold via a broker and listed on exchanges
- Inventory: raw materials like gold to make jewelry or goods ready for sale
- Accounts receivable: money owed to the business from product and service sales
- Prepaid liabilities: these are advance payments for future products and services. Although liquidation isn’t possible here, prepayment frees up cash for use elsewhere. Payments to an insurance company is an example of a prepaid expense
- Other short-term investments: like investing extra funds in short-term security with the option to access the funds if required
Advantage of Current Assets
- Represent the current health of your business – They show stakeholders your business’s quick cash source.
- Represent how day-to-day operations are financed – They demonstrate how the company acquires cash to pay for daily operations and clear debt without additional funds.
- Offer quick cash – They are readily available and can temporarily sustain a business going through financial struggles.
Disadvantages of Current Assets
- They yield a low amount of interest due to quicker turnover.
- They may not increase in value while held. However, if demand increases, there is potential for stock value to increase.
Key Differences Between Fixed Asset and Current Asset
|Fixed Asset||Current Asset|
|Liquidity||Fixed assets are mostly long-term, tangible assets that cannot be turned into cash within 12 months.||Current assets are short-term tangible or intangible assets that can be exchanged for cash within 12 months or one operating cycle.|
|Purpose||Fixed assets are purchased to deliver goods and services to generate income. They are not used as inventory for resale to the customer.||Current assets can be sold quickly to pay for daily operational expenses.|
|Asset Examples||Machinery, buildings, vehicles Land, and computers.||Bank accounts, inventory, money owed to the business, and prepaid expenses.|
|Where Is It Disclosed on the Balance Sheet||Under Noncurrent Assets||Under Current Assets.|
|Funding Source||Fixed assets require significant capital investment so smaller businesses typically purchase them using long-term finance instead of buying outright.||Current assets are acquired through short-term funds.|
|Valuation||Fixed assets are valued by the asset’s cost (net book value). Depreciation is subtracted from the original asset value.||Current assets are valued at the cost or market value, whichever is lower.|
|Sale||When a fixed asset is sold, the company will experience an operating gain or operating loss.||Once a fixed asset is sold, there will be a capital gain or loss.|
|Depreciation||Fixed assets will depreciate in value over its useful life due to wear and tear.||Current assets are not subject to depreciation due to their short life cycle.|
Use BlueTally for Solid IT Asset Management
Businesses that manage their fixed assets more efficiently gain a competitive advantage over their competitors. Especially those yet to be sold on the benefits of using IT asset management software over spreadsheets.
Consider the cloud-based asset management platform BlueTally to help keep your bottom line in check by keeping a close eye on the real-time status of your assets. It supports you in developing a comprehensive asset register by differentiating your assets with printable unique QR codes.
You can store the asset information you need using the custom fields feature. It has an extensive list of features, including Active Directory integration and a Rest API to pull asset data you have from other platforms for centralized management. And regarding accounting information, you won’t be disappointed with custom reporting and depreciation calculation features.
BlueTally lets you know what’s happening with your assets and inventory via a check-in and check-out process and low-stock notifications. People with permission can access all data anytime, and all your cloud-based data is encryption-protected using Amazon’s security.
Make the most of your assets to continue delivering high-quality offerings with BlueTally. We provide competitive pricing and a free plan with access to all the features to manage up to 50 assets. Take complete control over your IT assets, and sign up today to try it out for free.