Fixed assets are owned by the business and used to generate revenue, while inventory is a current asset because it is reasonable to expect it can be converted into cash within one business year.
From an accounting perspective, fixed assets and inventory stock both represent property that a company owns. Although both are listed under assets on financial reports, they are two different types of assets with unique characteristics. Together they form part of a company’s total assets, which are all the resources owned by the business, such as cash, receivables, inventory stock, investments, land, buildings and equipment.
It’s important to know what makes up your fixed assets, and particularly to understand what represents your consumable inventory because it loses value the longer it is held.
Fixed assets explained
As mentioned above, fixed assets are those assets, such as plant and equipment, that the business owns and uses to generate revenue.
In accounting, fixed assets are reported in the balance sheet as non-current assets, typically under headings like property, plant and machinery. They are recorded at their net book value, which is the original cost, minus accumulated depreciation and impairment charges.
Fixed assets are considered long-term assets, meaning the company expects to profit from using the asset over the long-term or useful life of the asset. This usefulness or asset’s value will diminish over time and the associated decline is recorded on the balance sheet as periodic depreciation.
As the value of each asset is reduced, financial statements will continue to use the original cost of the fixed asset rather than its current market value.
Inventory stock explained
In contrast, inventory is recorded on financial statements as a current asset because it is reasonable to expect it can be converted into cash within one business year. On your balance sheet, inventory is recorded at the amount paid to purchase it.
Inventory stock is your on-hand merchandise and all the input materials used in product creation. These are the raw materials for manufacturing, work in progress, finished goods and other merchandise and components purchased from suppliers.
Inventory control is critical to hitting profit targets because inventory turnover is a primary source of revenue. While it’s true the more inventory stock you have, the higher your current and total asset value, inventory should be sold as quickly as possible to generate cashflow.
Holding too much inventory stock for long periods can be risky because it ties up cash in unsold stock and incurs carrying costs. In addition, products can spoil, become damaged over time, or can simply become obsolete.
Too little inventory, on the other hand, means lost sales when you don’t have enough products available to sell consumers when demand is high.
Managing fixed assets and inventory stock
Equipment used to keep the business going, like computers and maintenance on copiers and printers, can be treated as fixed assets. However, stationery items or consumables are considered a part of inventory because they are fast-moving in the business.
It is important for companies to understand the difference between the two and to accurately track them. They must ensure the correct figures are reported on financial statements come tax time.
A robust tracking system is key to managing fixed assets and inventory stock. Look for one that enables you to calculate depreciation as part of your accounting process, monitor any maintenance needs and schedule repairs on your fixed assets.
An effective tracking system will provide a complete picture of fixed assets together with inventory stock. You will always be on top of all your assets at any given point in time and will improve inventory control by monitoring stock levels to avoid overstocking or stockouts.