Liquidity of an asset forms the basic difference between fixed assets and current assets, i.e. if an asset can be liquefied into cash within the operating cycle is known as a current asset. On the contrary, any asset which is not converted into cash for more than the operating cycle falls under the fixed assets category. In this article, we'll discuss distinguish between fixed assets and current assets, fixed assets and current assets etc.
The asset of a business can be classified into two parts Non-current/Fixed Assets and Current Assets
Let us see the difference between current assets and fixed assets to have a better understanding:
|Basis of Comparison||Fixed Assets||Current Assets|
|Liquidity||Fixed assets are the long term assets which will not be liquefied in an accounting year.||Current assets are those assets which will be liquefied in an operating cycle of a business|
|Convertibility||Cannot be easily converted into cash||Can be easily converted into cash|
|Holding period||More than one accounting year||Less than one operating cycle|
|Valuation||Asset value - depreciation||The market/book value of the asset or cost whichever is lower|
|Revaluation reserve||Asset value is appreciated||Not created|
|Appreciation in the value of land|
The differentiate between fixed assets and current assets can be clearly compared on the following grounds or difference between fixed assets and current assets with example
The fixed assets are the assets that are held by a business for more than an accounting year to generate income. On the contrary current assets are the assets that are held by the business not exceeding one operating cycle.
Conversion of fixed asset into cash takes a considerable amount of time and effort. On the other hand, a current asset can be easily converted into cash.
The fixed assets are recorded on the net asset value that is depreciation subtracted from the asset value. Whereas, the current asset is recorded at the cost or market value (whichever is lower).
In a case of fixed assets revaluation reserve is formed when there is an appreciation in the asset value. As against this, in the case of a current asset no such reserve is created. So this is main difference between fixed asset and current asset.
To sum it up the fixed asset and current asset can be compared on the basis of their liquidity and holding period.
Suppose, there is a company that manufactures sewing machine then the sewing machine manufactured would be stock for them & will fall under the current asset category. On the contrary, a boutique sewing machine is a capital asset and hence comes under the category of fixed assets.
Disclaimer:“The information and/or documents contained herein do not constitute any personal advice. Seek professional advice before taking any decision”