Fixed Assets vs. Operating Assets

A factory is a fixed asset -- and an operating asset.

A factory is a fixed asset -- and an operating asset.

Take a look at a typical company's balance sheet, and you'll find all sorts of things categorized as assets, but you probably won't see a specific listing for either "fixed assets" or "operating assets." They're there, though. You just have to know where to look. Fixed assets are defined by what they are. Operating assets are defined by how they're used. Often, an asset fits both definitions.

What Are Assets?

The business world has a very specific definition of "asset." For a company to claim something as an asset, the company must own it, or at least control it. The item must have a future economic value. And that future value must be objectively and reliably measurable. That last one keeps a lot of valuable stuff off corporate balance sheets. Your smile, your sense of humor or your mom's secret pumpkin pie recipe might be assets to your company, but you can't report them as assets on your books because they can't be reliably measured.

What Are Fixed Assets?

Think of a fixed asset as something you can stub your toe on: buildings, equipment, vehicles, furniture, land — anything with a physical presence that the company holds onto for the long term. On a company's balance sheet, fixed assets go by the name "property, plant and equipment," or just PPE. A company puts a fixed asset on its balance sheet at "historical cost," meaning that its stated value is whatever it cost the company to obtain the asset. The company then depreciates the asset — that is, reduces its reported value — over the life of the asset. Land, however, never gets depreciated.

What Are Operating Assets?

"Operations" refers to a company's core business activities. If you own a snow-cone stand, for example, then operations include making and selling snow cones. Operating assets are all the assets that the company uses to carry out those core activities. Fixed assets are usually operating assets, but so are cash, inventory, accounts receivable and natural resources owned by the company. Patents and brand names are "intangible assets," but if they're used in the normal course of business, then they're operating assets, too. A well-run company should be generating most of its money from operations. (If it isn't, then it's probably in the wrong business.) As a result, most of a company's assets will be operating assets.

Proportion of Total Operating Assets

In some companies, fixed assets make up a large portion of total operating assets. This is the case with capital-intensive companies like heavy manufacturers or airlines. Other companies have relatively little in the way of fixed assets.

 

About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

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