Current Assets vs. Fixed Assets: What’s the Difference?

Current Assets vs. Fixed Assets: An Overview

Every company owns a variety of resources for different purposes. Two of the main asset categories listed on a company’s balance sheet are current assets and fixed assets.

The balance sheet shows a company’s resources or assets while also showing how those assets are financed; whether through debt, as shown under liabilities, or through issuing equity, as shown in shareholder’s equity.

Current assets are short-term assets held for less than a year. Fixed assets are typically long-term assets, held for more than a year. However, there are other differences.  

Key Takeaways

• Current assets are used in the day-to-day operations of a business. Inventory is an example.
• Fixed assets are used over the long term. Office furniture is an example.
• Knowing where a company is allocating its capital and how it finances those investments is critical information for making an investment decision.
• It’s also important to know how the company plans to raise capital for its big projects; whether the money comes from a new issuance of equity or financing from a bank or private equity firm.

Current Assets

Current assets are defined as resources that can be converted into cash within one fiscal year or one operating cycle. They are used in the day-to-day operation of the business.

Importantly, they are considered liquid assets, meaning they can be readily converted into cash.

Examples of current assets include:

• Cash and cash equivalents, such as certificates of deposit
• Marketable securities, such as equity or debt securities
• Accounts receivable, or money owed to the company for selling their products and services to their customers 
• Inventory
• Prepaid expenses

Fixed Assets

Fixed assets are business resources that have a life of more than one year. They are recorded on the balance sheet and listed as property, plant, and equipment (PP&E).

Fixed assets are long-term assets and may be referred to as tangible assets, meaning they can be physically touched. 

Examples of fixed assets include:

• Vehicles like trucks
• Office furniture
• Machinery
• Buildings
• Land

Key Differences

Fixed assets undergo depreciation, which divides a company’s cost for non-current assets to expense them over their useful lives.

Depreciation helps a company avoid a major loss on its balance sheet when it makes a fixed asset purchase by spreading the cost out over many years. Current assets are not depreciated because of their short-term life.

Noncurrent assets (like fixed assets) cannot be easily liquidated to meet short-term operational expenses or investments. Fixed assets have a useful life of over one year, while current assets are expected to be liquidated within one fiscal year or one operating cycle. Companies can rely on the sale of current assets if they quickly need cash, but they cannot with fixed assets.

For example, if the economy is in a downturn and a company is not making any profits but still needs to make a debt payment next month, it can sell its marketable securities within a few days to raise the cash. It could not sell a factory or a parcel of land within a few days.

Special Considerations

Capital investment is money invested in a company with the goal of advancing its commercial objectives.

Capital Investment and Fixed Assets

Capital investment decisions are major planned business expenditures that include fixed assets. The money to fund these ventures can come from many sources, including angel investors, banks, equity investors, and venture capital firms.

Capital investments might include purchases of equipment and machinery or a new manufacturing plant to expand a business.

In short, capital investments for fixed assets mean a company plans to use the assets for several years. These purchases are also known as capital expenditures.

Capital Investment and Current Assets

Although capital investments are typically used for long-term assets, some companies use them to provide working capital. Current asset capital investment decisions are short-term funding decisions essential to a firm’s day-to-day operations. Current assets are essential to the ongoing operation of a company to ensure it covers recurring expenses. 

Capital investment decisions require analysis of many components, such as project cash flows, incremental cash flows, pro forma financial statements, operating cash flow, and asset replacement. The objective is to find the investment that yields the highest return while ignoring any sunk costs.

Return on invested capital (ROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.

There are several methods used in determining how to allocate capital to one investment versus another, including incremental analysis, whereby a company can calculate the differences in cost between different investment options.

What Are a Business’s Assets?

A business’s assets include everything of value that it owns, both physical and intangible. Physical assets include current assets, like its inventory, and fixed assets, such as the factory equipment that the company uses to build its products. Its intangible assets include trademarks, patents, mineral rights, the customer database, and the reputation of the brand.

Intangible assets are difficult to assign a book value, but they are certainly considered when a prospective buyer looks at a company.

How Are Tangible Assets Recorded on a Balance Sheet?

Long-term tangible assets are reduced in value over time through depreciation. Other tangible assets are recorded on a company’s balance sheet at the cost paid to acquire them.

How Are Intangible Assets Recorded on a Balance Sheet?

Intangible assets are recorded on a balance sheet only if they are acquired by the company rather than developed internally. They are listed as long-term assets and valued according to their price and amortization schedule.

The Bottom Line

Every company has both current assets and long-term assets. The stock on the shelves is a current asset, ready for immediate sale. The long-term assets include the business premises and all of the physical objects and machinery that the company needs to keep the business running.