A fixed asset is any tangible item that a business uses during the course of its operations but does not normally sell or consume. These include buildings, production equipment and machinery, land, automobiles and warehouse storage. For accounting purposes, a fixed asset is typically intended for use for at least one year. The opposite of a fixed asset is a circulating asset.
A circulating asset is any item that is normally consumed during the course of producing products. It does not refer to any items used during production, such as machinery. Instead, it refers to assets that must continually be replenished in order for the business to continue operations.
Cash is an essential circulating asset for running a business involved in the production and sale of products. It is necessary at the beginning of the business cycle to purchase raw materials to produce products. Cash also appears at the end of the business cycle, when the finished products have been sold to consumers.
Raw and Unfinished Material
Raw and unfinished materials are circulating assets because a business must purchase them to produce sellable products, and because the business depletes them in the course of production. Depending on the nature of the business and the types of products it manufactures, raw materials can range from wood to minerals to oil. Unfinished materials may include parts, such as batteries, moldings, connectors, wiring or casings used to produce consumer goods.
Inventory may consist pf partially finished consumer goods, or work-in-progress goods. It also consists of finished consumer goods that have been stored and are awaiting shipment to customers, retail stores or distribution outlets. As these circulating assets are sold, the business must continually replace them.