When you look at the financial statements that the accountants in an accounting firm in Singapore have prepared for you, you may see a long list of different items under the category of asset. These are the resources or items that your company owns, and they are predicted to bring monetary benefit to your company in the future. Two largest categories within the list would be the current assets and fixed assets.
In simple words, the key difference between the current assets and fixed assets is the level of liquidity they have. Current assets are the assets that the company can convert into cash within a year. Some examples of this type of asset are cash and cash equivalents, inventory, prepaid expenses, trade receivables and so on. On the contrary, the assets that the company would keep for one accounting year and above fall under the category of fixed assets. The latter is also known as non-current assets. This includes tangible and intangible fixed assets, furniture and fixtures, machinery, vehicles, software and others.
A company will trade the non-current assets that it owns and will not hold them for more than a year. Contrarily, it needs to use the fixed assets continuously so that it can generate income, and thus, the company will hold them for more than a year. Current assets are readily convertible into cash while fixed assets are not.
Besides, the method that the company should use when determining the value of these two classes of assets is different too. For the valuation of the current asset, the company should use the lower of cost or market value (LCM). On the other hand, the company should subtract the amount of accumulated depreciation from the assets’ cost to determine the value of fixed assets.
Most companies would choose to use long term funds to finance fixed assets. Contrarily, to finance current assets, they would use short term funds. In some occasions, the company may need to get financial assistance from the bank or other financial institution, and this may lead to the creation of charge on its assets (Also see How Do Assets and Equity Differ from Each Other?). For current assets, the type of charge that can be created on it is the floating charge, whereas fixed assets are subjected to a fixed charge.
If the company decides to sell its current assets, the sale will lead to revenue (Also see Introduction to Deferred Revenue) profit or loss. On the contrary, the sale of a fixed asset would bring to profit (Also see The Relationship Between Net Profit and Operating Profit) or loss, which is capital in nature. Also, the company will not create a revaluation reserve for current assets. It will only create a revaluation reserve when it appreciates the value of a fixed asset.