Understanding current and noncurrent assets in accounting

Accounting is thought of by many as simply basic mathematics consisting of adding and subtracting totals to track a company's spending and expenses; however, accounting involves so much more. Accounting comprises of a multitude of financial concepts and transactions. This system covers a broad array of information but in this paper the current and noncurrent assets will be defined, contrasted, and compared. In addition, the order of liquidity and how this practice applies to the balance sheet will be reviewed. Accounting is the means of communicating the numbers and to be successful in business the numbers have to be known "cold." Therefore, it is imperative not only to communicate the numbers effectively but also to understand them to thrive in a world submerged with figures.

Current Assets

To understand assets, they first must be defined. Assets are resources such as land, computers, buildings, cash, and supplies owned by an organization. Cash is the most important asset that any business can possess. Consequently, cash is considered a current asset. Current assets are those resources that a business anticipates to replace with cash or deplete within 12 months or its operating cycle dependent upon whichever is farther away. The common practice for most businesses is the cutoff to be classified as current assets is one year from the balance sheet date. Current assets include short-term investments, cash, receivables, prepaid expenses, and inventories. For example, accounts receivable are current assets because a firm expects to collect payments and convert these payments to cash within one year. Businesses list current assets in the order in which they expect to convert these current assets into cash.

Noncurrent Assets

Contrary, there are assets not converted into cash within one year or operating cycle. These assets are referred to as noncurrent assets. Noncurrent assets are property, equipment, long-term investments, facilities, and intangible assets. Long-term investments are noncurrent assets because these are typically investments in securities of other companies kept for more than one year. Noncurrent assets are also resources, such as property or buildings that an organization may not use currently in its daily operations. Because noncurrent assets such as delivery vehicles, equipment, and buildings have relatively long useful lives, these assets will not retain their full value during an operating cycle and are systematically reported by assigning a portion of the cost as an expense each year. This practice is known as depreciation, which the cost is never allocated during the same operating cycle that the noncurrent asset was purchased. Another type of noncurrent asset is intangible assets. Intangible assets are resources that do not have physical substance yet are very valuable. For instance, patents, goodwill, trademarks, copyrights, and trade names. Trademarks like the "Nike swoosh" are recognized worldwide therefore they are valuable, which make them assets.

Liquidity Order

Liquidity is a measure of an organization's ability to fulfill immediate and short-term financial commitments. Living in a cashless society, liquidity must be clearly understood to maintain financial stability. Liquidity order is the display of assets with cash always first, marketable securities, accounts receivable, inventory, fixed assets, and goodwill last. Conversion of assets to cash occurs within an operating cycle except for cash itself.

Liquidity Effects on Balance Sheets

The liquidity order presents assets on a balance sheet according to the amount of time it typically takes a company to convert them into cash. Obviously, cash does not need to be converted into cash therefore it always appears first. In most cases, marketable securities require a few days to convert into cash. Accounts receivable may either transpose into cash according to the firm's credit policies or immediately. Depending on inventory turnover rates and the number of inventory items not in a ready resale market, inventory conversion could take several months. Fixed assets conversion is solely dependent on the availability of interested buyers. Finally, goodwill is transformed into cash once the business is sold, which is why it is displayed last on the balance sheet.

Conclusion

Current and noncurrent assets were defined, contrasted, and compared in this paper. Additionally, the liquidity order and its relevance to balance sheets were reviewed. For a business to operate successfully, it must balance its current and noncurrent assets. These are the things that produce the one resource that a company cannot survive without; cash. Therefore, it is evident that both current and noncurrent assets are essential because the fruition of success for any business is driven by the numbers. If a business does not know the current and noncurrent assets it possesses, it cannot know its value or vision.