Assets vs Fixed Assets

Assets vs Fixed Assets | Accounting Smarts
Charles Hall

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Charles Hall

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June 10, 2022

Understanding accounting terms like the difference between an asset and a fixed asset doesn’t have to be difficult.

Understanding accounting terms like the difference between an asset and a fixed asset doesn’t have to be difficult.

A quick read of this article will give you what you need to understand so the discussion with your accountant becomes more productive.

Assets are the resources a company owns and uses to operate a business. Assets is a broad term and covers every type of asset that has value to a company from cash and receivables to buildings and equipment. Fixed assets on the other hand is a very specific noncash asset like land, buildings and equipment typically used to make a business more efficient.

In this post, you will learn about the different types of assets and tips for managing them.

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The Difference Between Assets and Fixed Assets

There are a few differences between assets and fixed assets tha a quick side-by-side comparison might reveal.

What Are Assets?

An asset is a resource that has a positive economic benefit for the owner or controller. You should be aware of a few different types of assets, but we will be making an in-depth comparison of two of them in this post.

Assets have different properties and classifications. The following are some of the ways in which assets are recognized. To be considered an asset, it must meet the following criteria:

  • Can it be owned? – If yes, and the assets in question can eventually be turned into cash or its equivalent, it is an asset.
  • Does it have value? – An asset must have economic value in which it could be exchanged or sold for goods or cash.
  • Is it a resource? – If it can generate future economic benefits, it can be an asset.

Once you have determined an asset's properties, it is easy to classify your assets into a category. Sometimes one item may fall into multiple categories, so keep this in mind when naming assets and balancing the books.

The following chart shows you how the different types of assets are classified:

The six major types of assets are defined above, but today we will focus on just two. We will now hone in on the definitions of current assets and fixed assets.

What Is A Current Asset?

A current asset is convertible and is easily transformed into cash quickly. It is also considered a short-term asset that will expire in less than a year.

Here are the key things to know about current assets:

  • Considered liquid assets – This means that current assets can be converted into cash fast
  • Converted in the short-term – Generally, these assets are converted into cash within a fiscal year or an operating cycle
  • Used for daily operations – Any expense that occurs on an everyday basis is a current asset.

Sometimes accounting can be confusing because there are multiple terms used to define the same thing. The current asset is no different. It can be referred to by a few different names within the accounting world.

To understand what an accountant may be talking about, know that the following list includes several alternative phrases that can be used to describe current assets:

  • Assets
  • Liquid assets
  • Short-term assets

Current assets are very important to a company's standing. As a small business, you should exactly want to know what your current assets total out to be.

The following is a list of different types of current assets:

  • Accounts receivable
  • Cash
  • Cash equivalents
  • Inventory or stock
  • Marketable securities
  • Notes receivable
  • Office supplies
  • Prepaid expenses
  • Short-term deposits

A current asset can be liquidated within a day or two. If your business needs cash for whatever reason, you can easily trade one of your securities in for cash. This is important to stay afloat, especially if your business may be experiencing hard times.

What Is Considered A Fixed Asset?

Fixed assets while they are convertible, like a current asset, they are different. Fixed assets are the long term tangible items a company has bought and can liquidate if necessary. However, liquidation of these fixed assets takes longer than liquidating a current asset.

Sometimes you may hear a fixed asset referred to as:

  • A long-term asset – Converted to cash in more than one operating cycle or fiscal year
  • A noncurrent asset – This asset cannot be liquidated quickly
  • A tangible asset – This type of asset has a physical existence you can touch, like most fixed assets.

Similar to how a few different phrases can be used for current assets, fixed assets are similar. And they are again similar in that there are quite a few items that are considered fixed assets for a small business.

The following is a list of several different types of items that are considered to be fixed assets:

  • Buildings
  • Equipment
  • Land
  • Machinery
  • Office furniture
  • Patents
  • Plant
  • Property
  • Trademarks
  • Vehicles

Of all these items listed as fixed assets above, only one of them does not depreciate over time, and that is land. Plots of land will actually gain value over time, so it is a great investment in your business over the long term.

How Fast Do Fixed Assets Depreciate?

One important thing to note is that fixed assets will depreciate in monetary value over time. As a small business owner, it is your job to track these assets' depreciation and record the loss of value over time.

In financing and accounting, depreciation is a revenue expenditure. Depreciation occurs because the item or asset is subject to frequent use, wear, and tear over time. When entering your assets on a balance sheet, you must use one of two methods to calculate depreciation.

The following chart highlights four types of depreciation calculations that are used in accounting:

It is best to use the double decline method of calculating depreciation for a plant, machinery, and equipment assets. This will help cover the fact that a machine receives heavy wear and tear all the way through its usefulness.

Generally, if using the production method, you will see the highest expenses about halfway through the asset's lifetime. And the production method allows for the wide variation in expense totals from year to year.

Keep these different depreciation methods in mind as you begin working on your management plan and start balancing your books.

How Do You Manage & Maintain Your Assets?

Having strict asset management in place is vital to keeping your budget trim. If you have multiple people doing the purchasing of assets, you may end up with a surplus. While in some cases, as in current assets, it is easy to liquidate these immediately, it is added work and a hassle.

This means you need to have a good management strategy in place along with a regular maintenance plan for your assets. Having a maintenance plan in place can reduce costs and keep your equipment in working order for a longer lifetime.

Being able to easily track all of your current assets and fixed assets in one place is vital for knowing the state of your business. In keeping a strict management plan, there are also a bunch of benefits.

Having an active management and maintenance plan can lead to the following benefits:

  • Better risk management
  • Decreased costs
  • Improved productivity
  • Increased efficiency
  • Reduced unforeseen incidents

With an active role in asset management, you can appropriately ensure you are keeping track of all your assets and organizing the relevant information associated with each asset.

However, tracking your assets is not the same as balancing the books. You should not get these two things confused.

Your books deal solely with the value of the goods, whereas a management and maintenance plan helps keep equipment functioning longer and operations running smoothly.

How Do You Record Assets When Balancing The Books?

Total assets are the combined value of your fixed and current assets. When you record the assets, you want to make sure that your total liabilities amount to a number that is lower than your assets. If that is the case, your small business is financially stable.

To begin recording your assets and balancing the books, you will need to start with creating a balance sheet.

Create A Balance Sheet

You can easily invest in software that will create a balance sheet for you, but it may be easier to understand the process of accounting and balancing the books if you complete the task using a spreadsheet.

The following list denotes the two main columns found on the simplest of balance sheets:

  • Assets – All the items your company or business owns
  • Liabilities – All of the debts your company or business has accrued

Now, we don't dive deep into liabilities in this article, but those are basically any debts you have as a business owner.

In one column, you have the assets, and in the other column, you have your liabilities. Add up the total in each column and then subtract the assets from the liabilities. The resulting value is considered the equity your business has. You want your equity to be a positive number, and the higher it is, the more financially stable your business is considered to be.

When creating a balance sheet, you must also decide how often you will balance it. Some people prefer to balance their books at the end of every month. Others like to balance their books at the end of a quarter.

There are three common errors you need to watch out for when balancing your books. They include the following:

  • An addition or subtraction error – If the discrepancy is a multiple of 10, this may be your error.
  • Duplicate or missing entries – This is one of the easiest mistakes to make but can be remedied simply by adding or removing an entry.
  • Transposed numbers – If this is the error, the discrepancy is always divisible by 9.

No matter how you choose to create a balance sheet or even if you decide to work with an accountant, errors are common. But most of the time, these errors can be rectified quickly and easily, especially if you are balancing the books regularly.

After all, it is important that you can account for your business's assets, liabilities, and equity. Without having full knowledge of those values, it can be very difficult to determine how successful your business truly is. And keeping balanced books only adds to the ease by which you can determine that for yourself.

In Summary: Fixed Assets Are Unlike Current Assets

Current assets and fixed assets are both assets that are convertible into cash. But they differ in many ways. While current assets are short-term and fixed assets are long-term, there is no value depreciation for the current assets.

In other words, the current assets retain their value over time, and fixed assets do not. The only exception to this is in land. Land is a fixed asset, but its value does not decrease over time.

Knowing both how many fixed assets and current assets a business has, you can get a sense of the capital or equity this business has available. It is an easy way to calculate the worth of a business fast.

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall