There has been a misconception or subtle debate on what is a fixed asset and what is a current asset. Both appear in the financial statement of every organisation that follows the Generally Accepted Accounting Principles (GAAP). Some schools of thought have this to say about fixed and current assets.
Current assets are short-term assets that are typically used up in less than one year. Current assets are used in the day-to-day operations of a business to keep it running.
Fixed assets are long-term, physical assets, such as property, plant, and equipment (PP&E). Fixed assets have a useful life of more than one year.
Fixed assets—also known as tangible assets or property, plant, and equipment (PP&E)—is an accounting term for assets and property that cannot be easily converted into cash. The word fixed indicates that these assets will not be used up, consumed, or sold in the current accounting year. The reverse is the case for current assets.
Generally, a company’s assets are the things that it owns or controls and intends to use for the benefit of the business. These might be things that support the company’s primary operations, such as its buildings, or that generate revenue, such as machines or inventory.
For an item to be considered an asset, the item must satisfy three requirements:
- It is owned by the organisation
- It has current or future value to the organisation
- It has been acquired at a cost that can be measured.
Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.
Some examples of Fixed Assets include Land: Land used for business operations, Buildings and factories, Furniture and fixtures, Leasehold improvements, Computer hardware, software and office equipment, Vehicles, Machinery and equipment and Tools.
In the Corporate Financial Accounting (CFA) course, the issue of fixed and current assets came up for discussion with different views and definitions of what fixed asset or current asset is. There, it was finally clarified thus.
Why is an asset treated or classified as a fixed asset and why is it treated or classified as a current asset?
The main primary reason is convention. A convention is also known as practice or non-custom.
The second criterion why we classify an asset as fixed or current is not because of the nature of the asset, nor duration of use or lifespan, rather it’s the intended purpose or use of the asset by the time it was acquired.
If the intention is to sell it as it is or convert it to goods or services or consume it, use it up or realize it as cash or it is cash then it is a current asset. Where this is not the case, not to sell it as it is, not to convert it to goods or services, it is a fixed asset. It is not the lifespan nor the duration that determines whether an asset is fixed or current. A company’s fixed asset can be another company’s current asset.