Fixed assets and current assets
In a company's balance sheet, assets are divided into two groups:
- Fixed assets
- Current assets
It is important to define the differences between fixed and current assets before discussing how to account for each. The classification of assets is not based on the physical nature of the asset, but rather on the purpose of the asset ownership.
Current assets are those that a company depletes in the typical course of business over the next year or business cycle, whichever is shorter.
Examples of current assets include the following:
- Cash
- Accounts receivable
- Prepaid expenses
- Inventory
Fixed assets are assets that a company owns and uses in the daily operations of the company and are not intended for resale to customers. The useful lives of these assets span multiple years.
Examples of fixed assets include the following:
- Automobiles
- Computers
- Machinery
- Buildings
- Copyrights or trademarks (a special class of assets frequently called intangible assets)
Based on these definitions, the same asset might be classified as a fixed asset in one company and as a current asset or inventory item in another.
An example of a company where the same asset might be classified as both fixed and current is an automobile dealership. The vehicles held for sale are inventory items in addition to current assets, whereas an employee's company car is a fixed asset.