There are different types of assets your business may have. You have probably heard of fixed and current assets. But, do you know the difference between fixed assets vs. current assets?
Fixed assets vs. current assets
Assets are items or resources your business owns (e.g., cash or land). They can be considered fixed or current, depending on the asset.
Current assets are items of value your business plans to use or convert to cash within one year. You sell, consume, and utilize these assets during your day-to-day business operations. Your current assets are short-term investments because you use or convert them into cash within one year.
Some current assets may be considered liquid assets. Liquid assets are assets that you can quickly turn into cash (e.g., stocks). Liquid assets are considered to be more liquid than current assets. For example, you can convert liquid assets into cash in a very short period of time, like one month or 90 days.
Current assets are essential to your business operations. You can use current assets to pay for daily operating expenses, which keeps your business operating smoothly. Understanding the value of your current assets is critical for planning your business’s short-term future.
Fixed assets, or noncurrent assets, are long-term properties that bring continual value to your business beyond a year (e.g., land). Fixed assets are the foundation of your small business and brings long-term value to your business as it grows. Unlike current assets, fixed assets can’t be converted into cash within one year.
Because fixed assets are long-term assets, they usually depreciate over time. Costs are spread out throughout several years versus one year. Current assets typically don’t depreciate because they are short-term.
Fixed vs. current assets on balance sheets
Your small business balance sheet gives insight on many aspects of your business, including your business’s assets. To better understand your business’s financial health, it’s important to keep track of your assets.
Record both your current and fixed assets on your business’s balance sheet. List the assets in order of liquidity. The more liquid an asset, the less time it would take to convert into cash. List your most liquid assets first. List your cash first because no conversion is needed.
Current assets are typically higher up on the balance sheet because they are more liquid. Fixed assets are further down because they are long-term assets that take longer to convert.
Current assets on your balance sheet may include cash, accounts receivable, stock inventory, and other liquid assets. You generally list fixed assets on your balance sheet as property or equipment.
The more frequently you update your balance sheet, the better. Your balance sheet gives you a snapshot of your business’s finances. Keeping current and fixed assets updated regularly in your books will help you create accurate balance sheets, evaluate your spending habits, and efficiently plan budgets.
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This is not intended as legal advice; for more information, please click here.