The terms “fixed asset” and “current asset” are often used interchangeably in financial accounting. While they both refer to resources owned by a business, though, they aren’t the same. Fixed assets are different than current assets, and it’s important to familiarize yourself with their nuances. Only then can you properly record your business’s finances.
What Is a Current Asset?
A current asset is a resource owned by your business that you intend to convert into cash or spend within 12 months. Inventory, for example, is typically considered a current asset. If you operate a retail store, your business probably owns inventory that it plans to sell within 12 months.
Cash is another example of a current asset. Most businesses don’t hold onto their cash. Rather, they invest it back into their business’s operations by purchasing relevant products and services. Regardless, the defining characteristic of a current asset is that it’s spent or converted into cash within 12 months.
Current assets are considered critically important to a business’s operations. Without them, you won’t have the means of funding your business and purchasing necessary products or services. Therefore, you should closely track your business’s current assets so that you’ll have a better understanding of its financial health.
What Is a Fixed Asset?
A fixed asset, on the other hand, is a resource owned by your business that you do not intend to sell or otherwise convert into cash in a short period of time.
Fixed assets differ from current assets in the sense that they can’t be easily converted into cash in a short period of time. Real property, for example, is considered a fixed asset. It’s a resource that’s essential to a business’s operations, yet it’s also something that can’t be easily converted into cash.
There are both tangible and intangible fixed assets. As you may have guessed, real property is a tangible asset because it’s something that you can see and touch. Trademarks and other forms of intellectual property are considered intangible assets because you can’t see or touch them.
It’s also worth noting that fixed assets depreciate over time, whereas current assets generally retain their value. The depreciation of fixed assets is recorded in journal entries by debiting the appropriate depreciation expense account. The good news is that asset depreciation is tax deductible — but only if you record it properly.
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