Distinguish between Fixed Assets and Current Assets.

Fixed assets and current assets are two categories of assets on a company's balance sheet, each serving different purposes and having distinct characteristics.

Fixed Assets:

1. Nature and Long-Term Use:

   • Fixed assets, also known as non-current assets or long-term assets, are items that a company acquires for long-term use. These assets are not intended for resale but are crucial for the company's operations over an extended period.

2. Tangible and Intangible:

   • Fixed assets can be tangible, such as buildings, machinery, and vehicles, or intangible, such as patents, trademarks, and copyrights. Tangible fixed assets have a physical presence, while intangible fixed assets lack a physical form but hold significant value.

3. Depreciation:

   • Tangible fixed assets are subject to depreciation, representing the gradual decrease in their value over time due to wear and tear. Intangible fixed assets may be amortized, reflecting a similar process of allocating their cost over their useful life.

4. Long-Term Investment:

   • Fixed assets represent a long-term investment, and companies often make substantial capital expenditures to acquire, improve, or maintain these assets. The decision to invest in fixed assets is strategic and involves careful consideration of future benefits.

5. Presentation in Financial Statements:

   • Fixed assets are typically presented on the balance sheet at their original cost, less accumulated depreciation (for tangible fixed assets). This presentation provides stakeholders with a clear view of the historical cost and the portion of the asset's value that has been used over time.

Current Assets:

1. Short-Term Nature:

   • Current assets are assets that are expected to be converted into cash or used up within one year or the normal operating cycle of the business, whichever is longer. They represent the short-term liquidity of a company.

2. Types of Current Assets:

   • Common examples of current assets include cash, accounts receivable, inventory, and short-term investments. These assets are crucial for the day-to-day operations of the business and are regularly converted into cash or used up in the normal course of business.

3. Fluctuating Values:

   • The values of current assets can fluctuate over relatively short periods. For instance, the value of inventory may change due to fluctuations in demand or changes in the cost of goods.

4. Working Capital:

   • Current assets, when compared to current liabilities, help determine a company's working capital. Working capital is a measure of a company's short-term financial health and its ability to cover short-term obligations.

5. Presentation in Financial Statements:

   • Current assets are presented on the balance sheet in order of liquidity. Cash and other assets expected to be converted into cash within one year are listed first, followed by assets with a slightly longer conversion period.

In summary, the primary distinction between fixed assets and current assets lies in their intended use, duration, and liquidity. Fixed assets are long-term investments intended for sustained use in the business, while current assets are short-term resources that support day-to-day operations and contribute to a company's short-term liquidity and working capital.