Current assets are items on a balance sheet. According to Investorwords, current assets equal “…the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year,” (2008). If a company goes bankrupt, current assets are easily liquidated. Additionally, current assets are a source of funds for most companies.
The importance of current assets to businesses is that these assets fund daily operations and expenses. Not only are current assets expected to be turned into cash, they many be sold, or consumed within a year. By contrast, non-current assets are not “…easily convertible to cash or not expected to become cash within the next year,” (Investorwords, 2008). Examples of non-current assets include fixed assets, leasehold improvements, andintangible assets, (Investorwords, 2008).
The differences between current and non-current assets include time and form. Current assets are intended for use within one year, while non-current assets are not. If a company owns land and a building as the center of its business, that company is not going to convert the land and building, non-current assets, to cash within a year. The company keeps both the land and building for longer time-periods. Another example of the difference between the two types of assets is equipment, or machinery. The company uses the equipment for its daily operations, and will not be done with the equipment within a year. The equipment is a non-current asset. Equipment and machinery belonging to a company depreciates over time. This is another characteristic of many non-current assets. Current assets do not depreciate within a year.
Dividing assets and liabilities into current and non-current allows for the calculation of working capital. This is the amount of current assets minus current liabilities. Working capital is the relatively liquid part of the company’s financial position.
The Order of Liquidity
Assets are listed on the balance sheet in order of liquidity. Current assets come first. This order begins with cash and cash equivalents, including temporary investments maturing within 90 days, but excluding cash restricted for purposes other than meeting current obligations. Next in the order are short-term investments. Debt security investments are classified as trading, available-for-sale, or held-to-maturity securities. Investments in equity securities are classified as either trading or available-for-sale securities. Trading and available-for-sale securities are reported at fair value, while held-to-maturity securities are reported at amortized cost, (NACUBO, 2005).
The order of liquidity on the balance sheet continues with receivables, which discloses the amounts of expected uncollectibles, nontrade receivables, and accounts pledged or discounted. Inventories are the next part of current assets, in which a company discloses the basis of valuation, pricing method, and completion stage of manufactured inventories. Last in the order of current assets are prepaid expenses, although expenses prepaid past the current operating cycle are reported as deferred charges in the “other asset” section of the balance sheet, (NACUBO, 2008).
The order of liquidity on the balance sheet moves toward non-current assets. Long-term investments are the next item on the balance sheet. These include investments in securities, tangible fixed assets not currently used in operations, special funds, and investments in affiliated companies or nonconsolidated subsidiaries. Long-term investments are those that management intends holding for an extended period.
Property, plant, and equipment are non-current assets next listed on the balance sheet in order of liquidity. Most of these assets are depreciable or consumable. The basis of valuation, any liens against the property, and accumulated depreciation or depletion is disclosed. Usually, a detailed classification of property, plant, and equipment is disclosed in a supplementary schedule, not the face of the balance sheet, (NACUBO, 2008).
Intangible assets are next in the order of liquidity. Intangible assets are resources without physical substance providing economic rights and advantages. Limited-life intangible assets are amortized over their useful lives and reported net of the accumulated amortization. Indefinite-life intangible assets are not amortized; instead, they are assessed periodically for impairment. Some intangible assets expenditures are not capitalized, but expensed as incurred, (NACUBO, 2008).
Last in the order of liquidity are “other assets”. This is a special classification for unusual items that cannot be included in one of the other asset categories. Examples include deferred charges, non-current receivables, and advances to subsidiaries. The classification of assets depends on the nature and the use of the item.
Business Accounting. (2003). Retrieved April 13, 2008 from URL http://home.millsaps.edu/
Investorwords. (2008). Retrieved April 12, 2008 from URL
NACUBO. (2008). Balance sheet classification. Retrieved April 13, 2008 from URL