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There is a lot of complex terminology for the accounting and legal questions in your business. It can sometimes be easy to confuse different concepts. Understanding the differences between asset types is essential when thinking about your business’ position, strength and balance sheet. However, it can be difficult to always distinguish between them, particularly current assets and fixed assets. This article will explain current assets and fixed assets, analyse the differences between them and what this practically means for your business.

What is a Current Asset?

A current asset is something your business owns or possesses that you can easily sell or convert into cash. Other forms of current assets, like stock or inventory for your business, are assets that are designed to be used within a year. You can think about current assets as items that your business could quickly turn into money to pay an unexpected expense or debt if required. This certainly includes money already in your bank account. It also includes other, less obvious assets like money that other businesses owe to you. 

When thinking about which of your business’ assets are current assets, look at items like:

  • undeposited cheques or other payments from your clients; 
  • the different bank accounts that your business uses; 
  • cash equivalents like investments of less than one year; 
  • supplies, stock and inventory; and 
  • raw materials used in your business.

It can sometimes be challenging to consider whether you can easily convert a particular asset into cash or not. Consequently, you might not consider something as a current asset. Another way of thinking about this concept is considering when your business expects to generate money from the asset. That is why short-term investments of less than a year are also current assets. 

Additionally, you should count raw materials and works in progress in your business as a current asset. Since you will likely sell the latter items and generate cash for your business, they provide ongoing operations and current assets.

What is a Fixed Asset?

Fixed assets are also called non-current assets. Think of things that your business owns that you would not expect to be able to directly convert to cash, either because the asset itself is not liquid or because you cannot easily sell it. This distinction is crucial when contrasting fixed assets with current assets. Common examples of fixed assets include:

  • some forms of intellectual property protection, such as patents; 
  • land, buildings and property; 
  • plant or other machinery used for production;
  • vehicles;
  • stocks, bonds and other long-term investments; and
  • computers, software, and furniture.

Another criterion for an asset to qualify as a fixed asset is that it must value $500 or more. Also, your business must own the item, although there are some exceptions for long-term leases. The asset must also have a useful life of over a year; it must be contributing something of value to your business.

What is the Difference?

A key distinction between current assets and fixed assets is this liquidation or cash flow timeframe. Current assets are already liquid, or your business expects the items to be liquidated (for instance, when you sell them) within a year. On the other hand, fixed assets you cannot liquidate, or they will not liquidate in the same timeframe. 

Why is the Difference Important?

Identifying fixed assets is critical to do in any business for reporting purposes. At the end of the financial year, your business will be able to claim a tax deduction for depreciation for most of its fixed assets. This depreciation deduction can be highly significant, making the distinction between current and fixed assets critical. The idea is that fixed assets offer value to your business but will lose their value over time. Consequently, the tax system can at least partially address this depreciation.

Key Takeaways

There are several differences between current and fixed assets. At their core, current assets are things that your business can access easily in the event of liability or a sudden cost. They include cash or items your business expects to turn into cash within a year. Fixed assets are long-term assets for your business and should deliver value over a long period. A key distinction is that you can usually claim a tax deduction on the depreciation of your business’ fixed assets. 

If you would like more information about managing your business’ assets, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a current asset?

A current asset is something your business owns or possesses that it can easily sell or convert into cash (or is already cash). Typical forms of current assets are stock or inventory, assets designed to be converted into cash through business activities within a year.

What is a fixed asset?

A fixed asset is something that your business owns or possesses that it cannot easily sell or convert into cash. It needs to be valued at $500 or more, and your business must own the asset.

Can you claim tax deductions on asset depreciation?

You can claim deductions for the depreciation of certain fixed assets – but not all. It is worth checking this over with an accountant if you are uncertain.

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