MEANING AND DIFFERENCE BETWEEN FIXED ASSETS AND CURRENT ASSETS

Fixed Assets:

• • Fixed assets, also known as long-term assets or non-current assets, are assets that a company holds for long-term use rather than for sale.
  • These assets are not intended for quick conversion into cash and are expected to provide benefits to the company for more than one accounting period.
  • Examples of fixed assets include property, plant, and equipment (such as buildings, machinery, vehicles), land, furniture, and fixtures.
  • Fixed assets are recorded on the balance sheet at their original cost minus accumulated depreciation. Depreciation reflects the gradual loss of value of these assets over their useful life.

Current Assets:

• • • Current assets are assets that are expected to be converted into cash or used up within one year or the operating cycle of the business, whichever is longer.
    • They are typically more liquid than fixed assets and are essential for the day-to-day operations of the company.
    • Examples of current assets include cash and cash equivalents, accounts receivable (amounts owed by customers), inventory (goods held for sale), marketable securities, and prepaid expenses.
    • Current assets provide liquidity to the company, allowing it to meet its short-term obligations, such as paying bills, salaries, and other operating expenses.
    • Current assets are also listed on the balance sheet, typically in order of liquidity, with the most liquid assets appearing first.

Key differences between fixed assets and current assets:

1. Nature and Usability:
   • Fixed Assets: Fixed assets, also known as non-current assets or long-term assets, are assets that are held for long-term use in the business. They are not expected to be converted into cash within the normal operating cycle of the business, typically over a year. Fixed assets include property, plant, equipment, buildings, vehicles, machinery, etc.
   • Current Assets: Current assets, on the other hand, are assets that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer. They are held for the purpose of trading or converting into cash and include assets such as cash, marketable securities, accounts receivable, inventory, etc.
2. Liquidity:
   • Fixed Assets: Fixed assets are generally less liquid than current assets. They are not easily converted into cash without disrupting the normal operations of the business.
   • Current Assets: Current assets are more liquid as they can be readily converted into cash within a relatively short period, typically within one year.
3. Role in Business Operations:
   • Fixed Assets: Fixed assets are essential for the productive operations of a business. They are used to generate revenue over an extended period of time and contribute to the company’s long-term growth and profitability.
   • Current Assets: Current assets are used to support the day-to-day operations of the business. They provide liquidity to meet short-term obligations and fund ongoing expenses such as salaries, utilities, and inventory purchases.
4. Valuation:
   • Fixed Assets: Fixed assets are typically recorded at historical cost less accumulated depreciation on the balance sheet. Depreciation is the systematic allocation of the cost of a fixed asset over its useful life.
   • Current Assets: Current assets are usually recorded at their fair market value on the balance sheet. However, certain current assets like inventory may be recorded at the lower of cost or market value to account for potential declines in value.
5. Risk and Return:
   • Fixed Assets: Fixed assets generally involve higher capital investment and are associated with greater risk due to their long-term nature. However, they also offer the potential for higher returns over time.
   • Current Assets: Current assets carry lower risk compared to fixed assets as they can be easily liquidated to meet short-term obligations. However, they typically offer lower returns compared to long-term investments.

COMPARISON: