What is the key difference between current and fixed assets?

The key difference between current and fixed assets lies in their liquidity and time frame for conversion to cash. Current assets are those that can be easily converted to cash within a year, such as cash, accounts receivable, and inventory. This classification of assets reflects their short-term nature and the expectation that they will be consumed or liquidated within the business cycle, which typically lasts one year.

Fixed assets, on the other hand, are long-term resources that a company uses in its operations to generate revenue and are not intended for immediate liquidation. Examples of fixed assets include property, plant, and equipment. These assets have a useful life extending beyond one year and are typically subject to depreciation over time.

Understanding this distinction is crucial for financial analysis and managing a business's balance sheet effectively, as it helps stakeholders ascertain the company's short-term liquidity versus its long-term investment in operations. Therefore, the answer highlights the fundamental nature of these asset types in terms of time sensitivity and conversion to cash.