Current and Non-Current Assets - Essay Example

Current and Non-Current Assets Finance and Accounting Current Assets Current assets can be defined as the set of assets which can be expected to be converted into cash readily in one year during the normal business cycle. These assets are also referred to as Liquid assets. These assets can also be used to pay off the current liabilities that are due within the next 12 months. These types of assets are characterized by short life span and swift transformation (Chandra, 2008). Example of current assets include cash and its equivalents, any short-term investments, accounts receivable, stocked inventory, marketable securities and any prepaid expenses.

Accounts receivable are the payments that have not yet been collected from customers. While reporting these, it is important to also measure the possibility of bad debt. Inventory comprises of three things: raw materials used in production, work in process and finished goods. The current assets differ from business to business. Some scholars argue that inventory is not readily convertible in and shall not be included in the list of current assets. For example, a manufacturer which manufactures heavy machinery and equipment will have a long production and sales cycle which will make inventory not easily convertible into cash.

Current assets are critical to a business in financing the day-to-day operations of the organization and pay off its current liabilities. Non-Current Assets Non-current assets which are also referred to as “Fixed assets” are the set of assets which can’t be easily converted into cash or not expected to become cash in a time span of one year. Another way of defining non-current assets is the assets that are not directly sold to the organization’s end customers. Fixed assets are generally classified in three line items: Long-term investments, property, plant and equipment and Goodwill and other intangible assets.

Long-term investments are the investments made in bonds of duration more than 1 year or shares of other companies. The value of these investments may change over time which implies that the value that is mentioned in the balance sheet is thoroughly analyzed. The second line item is the set of assets such as land, buildings, factories, office furniture and equipment, and machineries. The cost of such kind of assets is the sum of its purchase price and import duties minus any trade discounts or rebates.

A very important concept in the reporting of fixed assets is that of depreciation. In simplest of terms, depreciation can be defined as the expense generated by the use of asset. It is usually divided over the complete economic lifecycle of the asset. All fixed assets are reported as net of accumulated depreciation in the balance sheet of the organization. As a result of the depreciation, the value recorded in the balance sheet might not always be the correct indicator of the actual worth of these assets.

The third category of fixed assets is the goodwill. Simply put, Goodwill is the additional value that a firm attracts above the value of its assets as a result of the reputation that the organization enjoys. This is also referred to as the quantifiable “prudent value” above its assets for a firm. Difference between Current Asset and Non-Current Assets The primary difference in current and non-current assets is in the time they take to get converted into cash. Current assets are more readily convertible into cash as compared to non-current assets which are fixed in nature.

Both current as well as non-current assets are important to an organization. While current assets are used primarily in income generation, non-current assets are aimed at profit making. Order of Liquidity Order of liquidity explains the time it takes for the assets to be liquidated. In the broadest sense, current assets are more liquid as compared to fixed assets. In current assets, cash in hand is the most liquid of all assets. Accounts receivable take more time than cash to get liquidated. The least liquid current asset is the inventory or work in progress.

This is because inventory might have a long selling cycle. Amongst non-current assets, goodwill is the least liquid because it is not easily quantifiable. Order of liquidity to balance sheet When applied to a balance sheet, order of liquidity is listing down the assets in decreasing ease of liquidity. It is also important to make sure that the conversion is made at a fair price. So, cash is reported as the first asset. This is followed by accounts receivable and inventory. The same order is followed while listing the liabilities as well.

References Chandra, P. (2008). Financial Management: CFM-McGraw-Hill professional series in finance, 7th ed. New Delhi: Tata McGraw-Hill.