Classification and characteristics of current and noncurrent assets

¶ … Noncurrent Assets

Current assets

One may define assets as those properties that are under the ownership or are the possession of a firm. Assets are divided into two like current assets and long-term assets. Long-term assets include land, buildings, and firm vehicles. Current assets are those assets that the firm can easily change their form of cash and they are perceived to take less than one year. Such assets include cash, debtors and stock (Vause, 2009).

Noncurrent assets

This is the other group of assets apart from the current assets but current assets are expected to change their form within the period of one year (the normal business operating cycle). The major non-current assets are as follows: long-term investment, intangible assets, equipment, plant and property. We have other terms that people are used in place of non-current assets and they include long-lived assets, long-term assets and fixed assets just to name but a few (Vause, 2009).

Equipment, plant and property are the only available assets with state of physical existence. One may decide to call them tangible fixed assets that are also recommendable. These physical non-current assets are further divided into classes like vehicles, buildings, land improvements and land. Land improvements are the structural extras added on to land for example landscaping, fences, parking lots and so on (Alexander, Britton & Jorissen, 2007).

Intangible fixed assets are defined as the assets which do not have a physical existence and they include goodwill, copyrights, and patents and so on. One may define long-term investments as the investments whose realization may come in place after duration of more than one year. For example, a company uses five million to buy ten-year shares of a certain company on 1 January 2010; this will be recorded down as part of the long-term investment because they will be returned back after ten good years as they are under non-current assets (Alexander, Britton, & Jorissen, 2007).

Difference between current and noncurrent assets

The two definitions of fixed assets and current assets make use of the term operating cycle, which is an important business term. It is defined as the period of frequencies in which a business goes through in the course of operations. The operations include three phases, which include collecting, selling and purchasing. The course of this cycle involves cash payment in terms of purchasing and issues a receipt of cash and hence the operating cycle is the average period of cash changing its form but then coming back as cash (cash back to cash).

Current assets include those assets that are not in cash form and they are supposed to be converted to cash, consumed or sold within a maximum period of one year (operating cycle of the business). When writing the balance sheet, the current assets and non-current assets are listed according to their order of liquidity. Liquidity is described as cash available; the faster non-cash assets can be converted into cash (Van, 2007). Current liabilities are those obligations that need elimination within a period of one year (operating cycle of the business). The settling of these liabilities is either done through payment using current assets for example cash, or rather by coming up with other current liabilities. Similarly to assets current liabilities and non-current liabilities, when writing the balance sheet are written according to their order of liquidity or according to the date of payment scheduled (Vause, 2009).

How the order of liquidity applies to the balance sheet

A balance sheet is divided into two parts (the left side and the right side). This cannot be compared to the credit and debit side of a ledger account simply because the balance sheet is an account. The balance sheet does not record words such as 'By' or 'To'; the left hand is posted with liabilities including all the credit balances for personal and real accounts while the right hand is posted with debit balances of personal and real accounts. The left side is known for liabilities while the right side of assets. There is a certain order to be followed while posting liabilities and assets in the balance sheet. The act of arranging these liabilities and assets in the balance sheet is referred to as 'Marshalling' of liabilities and assets. Two systems are accountable for order of arrangement of the assets and liabilities: Order of permanency and order of liquidity (Alexander, Britton, & Jorissen, 2007). In order of liquidity the first in the list are assets, which are easily realizable and the second to follow are assets less reliable. Therefore, the assets that are hard to be realized close the list. As for liabilities, are arranged according to their level of urgency.