Inventory Vs. Fixed Asset

by Kenneth Hamlett, studioD
Various accounting differences exist between fixed assets and inventory.

Various accounting differences exist between fixed assets and inventory.

binder pad accounts image by Nicemonkey from <a href=''></a>

Most companies have a mix of fixed assets and inventory. Although both act as assets, each gets treated differently on a companies financial statements. Different generally accepted accounting principles govern the disposition and tax treatment of these assets. For small businesses seeking funding, potential lenders and banks scrutinize fixed assets very closely.

Fixed assets

For most companies a fixed asset normally represents equipment and machinery, real estate holdings, fixtures, buildings and other items deemed hard assets. Fixed assets typically lose value over time or depreciate. In general fixed assets do not get converted into cash or consumed, such as inventory at a production facility, during the normal course of business.

Current Assets

A company&amp;rsquo;s current assets consist of its cash, government securities, accounts receivable, inventory and raw materials plus any additional items that the company can convert to cash within a year. For the small business, its biggest percentage of assets usually consist of cash and inventory. These assets also get referred to as liquid or soft assets. Because inventory gets consumed or sold during the normal course of business (within one-year) it cannot get depreciated on a company&amp;rsquo;s books.

Cost of Goods Sold

As an asset, inventory gets reported on a company&amp;rsquo;s balance sheet at the amount paid to obtain the asset, not its selling price&amp;ndash;this is known as cost of goods sold. CoGS include the actual cost of the merchandise plus the total cost paid to purchase, receive the merchandise and make it saleable. Cost of goods sold gets reported on a company&amp;rsquo;s income statement when sales revenue gets reported.


Because fixed assets have a useful life, companies depreciate the cost of the asset over its useful life. For example, a company purchases a new packaging machine for $250,000 and expects it to have a useful life of five years. The company depreciates, or reduces the value of the machine, by $50,000 each year over the next five years. The depreciation amount gets entered as an expense on the income statement, and on the balance sheet the same amount reduces the asset&amp;rsquo;s value. Both financial statements use the original cost of the machine, not its current market value or replacement cost.


A lot of confusion can surround the tax implications and accounting regulations involving fixed assets and inventory. It&amp;rsquo;s wise to consult a tax professional for specific guidelines relevant to each small business.

About the Author


Photo Credits

  • binder pad accounts image by Nicemonkey from
Suggest an Article Correction