Fixed and current assets both play a pivotal role in a business’s long-term success.
Imagine, you are a run a clinic. You need X-ray machines, examination tables, and office furniture – as your fixed assets, that will provide long-term value for your practice. On the other hand, the bandages and other medical supplies will be used for day-to-day operations – are your current assets. As a business owner, you will need to have a solid understanding of fixed assets vs current assets and a system in place to manage both simultaneously.
As of November 2023, businesses operating in China saw a 2.9% increase in fixed asset investments. The growing number emphasizes the need to better manage liquidity and expansion with a clear understanding of short-term and long-term assets for successful company operations.
This blog explains the key differences between fixed and current assets, their examples, and how they can help run smooth operations.
What are fixed assets
One of the common types of assets that are tangible, and have a long useful life are fixed assets. They are one of the most fundamental elements of company operations as without them it can difficult to run daily activities. Usually they are listed in the non-current asset section of the balance sheet and purchased with the intention of use instead of resale.
Characteristics of fixed assets
Purpose
Fixed assets are used for daily business operations such as production of goods. A manufacturing company will require plants, assembly lines and other heavy equipment machinery. Similarly a construction company would use a truck with the intention to use it for onsite operations.
Useful life
Fixed assets are used for long-term periods as they can be easily used for over a year. However, their value keeps depreciating with wear and tear.
Tangibility
Fixed assets are tangible, they can be seen and touched. For instance, tools and equipment used in an office.
Benefits of fixed assets
Businesses need to be mindful of asset lifecycle management as it helps them operate their processes and earn revenue. Since they are of high value the more fixed assets a company has, the more net worth it is likely to have.
Fixed assets are critical for companies because they help:
Increase business support
Fixed assets are helpful to generate revenue for businesses. For example, machinery or vehicles are supportive for the administrative functions. A high number of fixed assets can be used to expand the production level of a business as well.
Boost company value
Because fixed assets are high value items, they represent a company’s overall value. Therefore, the more fixed assets a company has the better its value will be in terms of investments, mergers, and acquisition partnerships.
Drive growth
Fixed assets are easily usable as collateral for loans to pursue new business opportunities. A company’s cash flow can be improved once they have access to the additional funding, such as credit secured by its warehouse.
Why are fixed assets important
There’s more to fixed assets other than their operational functions. Fixed assets carry a high financial value and determine a company’s worth. They are critical to several stakeholders and are included in the following statements:
Balance Sheets
Investors are interested in fixed assets on the balance sheet. These are the key indicators of a company’s worth. Therefore, fixed assets are separated from other non-current assets. With time, these assets depreciate in value such as PPE (property, plant, equipment).
Income Statement
A fixed asset’s depreciation expense is displayed on the income sheet. For instance, a forklift was purchased at the full cost of $100,000. Each year it incurs an expense of $10,000, reflecting its value with time. Recording and showing depreciation of the fixed assets is useful to make the financials look more balanced.
Cash Flow Statement
There are two prominent ways fixed assets benefit the cash flow statement. Firstly, the depreciation expense is reversed because it is a noncash expense. It helps to focus on the cash expenses to evaluate the liquidity. Secondly, activities involving fixed assets, like buying or selling, are separated from daily operations. Such purchases are a one-time event.
Keeping these in mind, you can come up with an efficient asset management plan throughout the asset lifecycle to identify the fixed assets used for regular cash flows and cash needed for long-term investment.
Tax Return
Fortunately for most companies, fixed assets come with their fair share of benefits in terms of tax returns.
Companies need to include depreciation in their balance sheets as expense, which leads to a lower taxable income. For example, an office vehicle can depreciate in five years of its useful life but it can expand to an eight year instead – leading to a higher depreciation value being recorded in the sheets.
What are current assets
A current asset is also known as a liquid asset. It is a resource used by a company with the purpose of being converted into cash or to be sold within one fiscal year. It can be cash in the bank, accounts receivables or simply assets to be used in the short-term. Current assets are the quick cash reserves that are readily available to cover bills and expenses.
Characteristics of Current Assets
Liquidity
The majority of current assets are quite liquid; in fact, they are commonly called liquid assets. Assets have the ability to provide businesses with the quick money they need to meet their operational demands.
Working capital
The working capital of a business is largely derived from current assets. Working capital is what remains after deducting current liabilities from the entire value of current assets.
Fluctuating value
The value of a current asset can fluctuate due to changes in the economy, client demand, or market conditions. For example, inflation and increased demand may have an impact on inventory costs.
Benefits of current assets
One of the major strategies to benefit from current assets is to focus on asset management automation. You can easily track and manage them and benefit from the following:
Cashflow support
Because current assets are fluid, they are highly significant for cashflow. It allows companies to better manage their daily operations and expenses such as payroll or purchasing of raw materials. In case of any unexpected opportunity, liquid assets come in handy.
Operational efficiency
When account receivables are timely collected, they ensure a guaranteed stream of cash for the daily operations. It is important to have sufficient cash to buy new inventory and supplies to boost sales.
Credibility with investors
A credible current asset position also ensures a strong cash flow. It shows your investors that you are creditworthy and in position to expand while meeting your short-term financial needs.
Examples of current assets and fixed Assets
Let’s discuss some of the primary examples of current and fixed assets that a company uses over a period of time.
Fixed assets examples
Land
The part of land used by the company to operate its business. Although land can be resold, it is a common example of a fixed asset.
Buildings and Factories
A business usually has office, warehouses, garage(s) or even workshops. These are part of the fixed assets.
Furniture and Fixtures
Any type of furniture or fixture used by the company such as office supplies, desks, chairs, lights etc., are examples of fixed assets.
Computer Hardware
Laptops, tablets, PCs, and servers all are fixed assets used by a business in daily operations.
Vehicles
All vehicles such as cars, forklifts, tractors, trucks, vans etc., are common examples of fixed assets.
Machine and Equipment
Businesses using heavy-duty equipment like assembly lines, and equipment like surgical tools are also considered fixed assets.
Examples of current assets
Inventory
All the finished goods, work-in-progress and raw materials mentioned on the balance sheet are part of the inventory. But if an inventory is held onto for more than one fiscal year it will be a non-current asset.
Supplies
As long as your business has a stock of supplies that are unused they will be considered as current assets. A common example is maintenance supplies.
Other liquid assets
If a business has any easy-to-convert current assets within one fiscal year, they identify as liquid assets. For example, promissory notes.
What are the differences between fixed and current assets
Take a look at some of the differences between fixed and current assets discussed below:
| Factors | Fixed Assets | Current Assets |
| Definition | Long-term assets purchased to earn more income | Type of assets used by company for not more than a year |
| Conversion of Cash | Not easy to convert to cash | Easy to convert to cash |
| Value | Value is calculated after depreciation from the cost | Value is calculated on the lowest value of original purchase or the current market value |
| Financing Type | Long-term funds used | Short-term funds used |
| Holding Period | More than one year | Less than one year |
| Service Tenure | Long-term use | Short-term use |
| Investment Type | Long-term investment | Short-term investment |
| Charge Type | Have fixed charge | Have floating charge |
| Revaluation Reserve | At time of appreciation in price | Not created |
| Depreciation | Undergo depreciation | Liquidated within one fiscal year |
| Durability | One year or longer | Less than one year |
Steps to managing current and fixed assets
Businesses can use asset management system, like EZOfficeInventory, to optimize the use of their current and fixed assets..
Here’s how you can manage your resources easily and efficiently:
1. Create an asset repository
Easily build a centralized asset repository to record and story essentail asset information. . You can catalog current and fixed assets under one roof and simplify their asset management with a clear view. You can document your the use of surgical and office supplies or any other type of fixed and current asset.
2. Track location and quantity of assets
For a smooth operation, you need to know where your assets are located and quantities they are being used in. Using an asset management system, you can ensure real-time fixed asset tracking by checking the location of assets – enhancing their security.. You can also make quick adjustments to the asset location and quantity as per requirement and prevent any loss.
3. Perform asset maintenance
Who doesn’t want to keep a proper check and balance on asset maintenance, right? A regular maintenance will help your business to avoid hefty upkeep costs of fixed assets. Just schedule and track the fixed assets activities to eliminate any unexpected downtimes.
4. Manage depreciation
With a tracking system in place, you can track asset depreciation, easily monitor the depreciation schedules, and get the insights for the asset’s diminishing value. It’s a powerful feature for financial reporting!
5. Generate asset reports
You can generate in-depth asset reports to get a holistic view of the financial and operational worth of your assets. Create a myriad of reports, including financial, maintenance, and asset utilization reports to get an insight into your current and fixed assets.
You can also create informative graphs and charts to better understand data.
Manage and automate the use of your fixed assets
Whether you run a small business, or own a tech startup, the key to your business success depends on multiple factors, but importantly on understanding the key differences between current and fixed assets. With asset management system, managing and automating asset management is a breeze. It’s just the right tool you need to optimize and manage the operational efficiency you see
Explore how EZOfficeInventory can help you with asset management and feel the difference yourself!
