Knowing the difference between current and noncurrent assets is important for managing your company’s balance sheet.
Current assets are short-term assets that you can easily convert to cash.
Your noncurrent assets will be around for longer than a year and help define the long-term financial health of your company.
Learn about the difference between current and noncurrent assets and how the two affect your company’s bottom line.
Accurate financial records give a clear view of your company’s current financial status and help you make better decisions and avoid financial surprises. The balance sheet, income statement, and cash flow statement are the three components of your company’s financial statement and a formal record of your financial activities. The balance sheet itemizes your company’s assets and liabilities. Tracking your assets and liabilities lets you see what you have on hand versus what you owe. Let’s define some key terms before explaining the different types of assets.
Basic Accounting Terms
Asset. An asset is everything a company owns that provides economic value. An asset can be something currently held by your company or something owed to your company. Common examples of assets include cash or cash equivalents, product inventory, equipment, and accounts receivables.
Balance Sheet. A company’s balance sheet is the portion of the financial statement used to report assets, liabilities, and shareholder equity. The report is prepared at the end of an accounting period, such as a month, quarter, or year.
Liability. Considered the opposite of an asset, a liability is something a company owes another entity. Common liabilities are loan debt, mortgage, employee wages, and accounts payables.
Liquidity. Liquidity refers to the speed or ease of turning an asset into cash. A company’s liquidity refers to its ability to raise cash.
Solvency. A company’s solvency is its ability to meet its short-term and long-term debts and thus, continue to operate. Assets minus liabilities is a quick calculation for determining solvency.
Current Vs Non-Current Assets
Assets are classified as either current or non-current. Here’s how to understand the difference between the two.
What are Current Assets?
Current assets are a company’s short-term, liquid assets that can quickly be converted to cash. They keep the company running and pay the current expenses, including wages, utilities, and other monthly bills. Current assets are converted to cash within the current fiscal year and are reported at the top of the balance sheet at market price.
Examples of current assets include:
- Accounts receivables
- Cash or cash equivalents (certificates of deposit, money market funds, treasury bills)
- Inventory, including raw materials and finished goods
- Prepaid expenses or advance payment for goods and services
- Stocks and bonds that can be sold on the public stock exchange
- Marketable securities
What are Noncurrent Assets?
Noncurrent assets are long-term assets (also called long-term investments) with a useful life of more than one year. Noncurrent assets can generally be divided up into two categories: tangible and intangible assets. Natural resources can also be considered a form of noncurrent asset. The main thing that distinguishes a noncurrent asset from a current one is that noncurrent assets cannot easily be converted into cash and are investments that fund future needs. They are reported at the bottom of the balance sheet and recorded at cost minus depreciation.
Examples of noncurrent assets include:
- Property, plant, & equipment (PP&E), are also referred to as tangible and fixed assets. This includes land, buildings and vehicles.
- Trademarks, patents and copyrights, or intangible and nonphysical assets
- Other assets that are not considered current
Assets and Your Company’s Financial Health
With your balance sheet and some basic calculations, you can get a view of your company’s financial health for a given period of time. One of the key indicators of whether your company is stable is solvency.
What is Solvency?
Very simply, solvency is a company’s ability to meet long-term debts and other financial obligations. It’s important because it indicates whether or not a company is likely to stay in operation in the future.
One way to determine a company’s solvency is the current ratio, which is a financial ratio gleaned from the balance sheet.
A company’s current ratio indicates the proportion of current assets to current liabilities (also called short-term debts), which are liabilities that have to be paid within the year. This ratio indicates your company’s liquidity, so a larger current ratio is better than a smaller one. If you have a ratio of 2:1, you have twice as many current assets as current liabilities. A company is solvent if it has assets in excess of its liabilities.
A current ratio of less than 1:1 could indicate you are insolvent, with more current liabilities than assets.
Another way of looking at financial health and a company’s solvency is through the idea of working capital.
What is Working Capital?
Working capital is another way to look at a company’s financial health. Working capital is the amount of current assets minus the amount of current liabilities. If a company’s working capital is positive, it has more assets than liabilities and is solvent.
Many people look at total assets, the value of both current and noncurrent assets and total liabilities to determine solvency. This approach allows you to see into the long-term and determine your ability to meet your future obligations.
Why Does Current Vs Non-current Matter?
The bottom line is that the distinction between current and noncurrent assets is a distinction of timing. Knowing how many assets a company has and when those assets will be used or consumed gives the most accurate view of a company’s finances in the present, as well as a picture of the company’s financial future.
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