All The Difference Between Current And Non-Current Assets
The distinction between current and non-current assets is made regarding a company’s resources. The timetable for using existing and non-existing assets is the most significant factor determining their classification. Balance sheets list both current and non-current assets.
They are listed as separate categories before being summed up and reconciled against liabilities and equities.
A company values current and noncurrent assets, although they create profit in distinct ways.
We’ll review the differences between current and noncurrent assets and present an example of a financial statement that includes both kinds.
What are the Current Assets
Current assets are the sum of all assets that may be converted into Cash within a year.
A firm’s current assets exist apart from other resources because it relies on them to finance continuing operations and pay immediate costs.
Current Asset Formula
It’s a very easy formula for determining the current asset:
Current Assets = Cash and cash equivalents + Accounts receivables + Inventory + Marketable securities + Prepaid expenses + Other liquid assets
To discover the components of this formula, consult the balance sheet. These are found at the top of the sheet under “assets.” Current assets are listed first, followed by long-term support.
Cash & Cash equivalents
Cash and cash equivalents are the most liquid assets. When a balance sheet is constructed based on liquidity, these are typically the first line item on the asset side of the equation.
A firm’s cash equivalents are as liquid as money and are frequently referred to as cash equivalents.
It’s critical for the company’s short-term solvency. The cash balance displayed under current assets is the amount still available to the business.
This Cash can be utilized to meet everyday costs right away. Coins, currencies, deposits in a bank account, and money orders are typically included.
As a result, Cash appears first under the account head “current assets” in the balance sheet since it is the company’s most liquid asset. This is because all current assets’ account items are arranged in order of liquidity.
Cash equivalents are short-term, interest-bearing financial assets that firms may invest in.
These instruments are extremely liquid, safe, and readily convertible into Cash. Furthermore, treasury bills, commercial paper, and money market accounts are all included in this category.
Also, such assets trade easily on the market, and their values can be quickly calculated.
This is why one of the most important cash management techniques entails that idle money should not be kept in unproductive accounts. Surplus cash, on the other hand, must be put into marketable instruments instead of being trapped in useless accounts.
The amounts a firm’s customers towe o it for the goods and services provided on credit are known as accounts receivables.
The accounts receivables are reported in the balance sheet at net realizable value. These values include bad debt costs.
The allowance for doubtful accounts is based on a worst-case scenario in which the company’s bad debt expense increases. As a result, the net realizable value of funds receivables is calculated. The likely net worth of funds receivables is the difference between gross receipts and the allowance for doubtful debts.
As accounts are not collected from customers, there may be instances when accounts receivables must be removed from the balance sheet.
In such circumstances, gross liabilities and provisions for doubtful accounts should be reduced. Furthermore, companies must identify problems with their collection methods by comparing versions of receivable sales ratios.
Inventories are simply a sum of goods that are either:
- Stocked to be sold in the normal course of business (finished goods)
- In manufacturing, it would be completed (in-process) and then sold (work-in-progress).
- During the production of items that will be sold in the future (raw material), they will soon be used.
It’s critical to note that the items included in the Inventory would ordinarily be offered in the business. As a result, for merchandising firms, goods available for resale are part of the Inventory.
For manufacturing businesses, items accessible as raw materials, work-in-process, and completed products are all inventory elements.
Raw materials are materials that are used to make things. Work-in-progress refers to products still in the manufacturing process and have not yet been completed. Finally, finished goods represent items that have been completed and are waiting for a sale.
Now, inventory cost includes all the expenses involved in bringing items into a location and changing them so they may be resold. This means the inventory cost includes purchase price, conversion costs, and other shipping-related expenditures.
The following expenses are not included in the inventory price:
- Organic waste of money, labour, overhead, and abnormally high spoilage.
- Storage expenses.
- Overhead expenses for administration.
- Selling costs.
As a result, various inventory costing techniques must be employed once the unit cost of Inventory has been determined. These methods are used to provide a systematic approach to calculating inventory costs.
This is because each item in the Inventory has its own cost.
The company’s investments are known as marketable securities. These assets are both readily commercial and are forecast to be converted into Cash within a year. Examples of such investments include treasuries, notes, bonds, and equity shares.
When these financial instruments are bought, they are recorded at cost plus brokerage expenses. On the other hand, the worth of these securities can change dramatically.
Because such investments are readily marketable, their value fluctuates frequently. As a result, the firm’s income statement reflects this price difference.
Furthermore, you’ll find information regarding such investments in the financial footnotes.
The term “prepaid expenses” refers to operating costs paid in advance.
As a result, Cash is subtracted from the balance sheet at the start of an accounting period. Simultaneously, prepaid expenses create a current asset worth the same amount on the balance sheet.
Prepaid expenses aren’t converted to Cash but are still considered current assets since they’ve already been paid. A company’s insurance or rent payment is an example of this.
Although current assets initially offset these initial-cost expenditures, they become expenditures from existing holdings over time.
At a time when the organization gets value from an asset like that, accounting standards require such costs to be converted.
Prepaid rent, insurance, and other similar services are examples of prepaid expenses.
Other Liquid Assets
Deferred assets are another category of current assets. In these situations, the tax payable surpasses the recognized income tax expense in the business’s income statement. This might occur if:
- They appear on the income statement in other expense categories.
- The IRS requires all firms to pay taxes on their corporate income, even if they are not reflected in revenues or gains until later.
As a result, this deferred tax asset is gradually reversed. It is changed when the cost is recorded for tax purposes. The income statement may recognize Revenue or profit as a result of such expense.
Ratios Using Current Assets
Ratios assess a company’s liquidity and offer investors a genuine insight into its performance. The current, quick, and cash ratios are the most frequent ratios.
Current Ratio Formula = (Current Assets/Current Liabilities)
The current ratio measures a firm’s capacity to meet its short-term obligations, generally due within a year. A current ratio less than the industry average indicates that the company is riskier of defaulting on its short-term obligations. Companies with a current ratio too high to the industry standard pose similar problems.
Quick Ratio Formula = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable)/(Current Liabilities)
The quick ratio is a more conservative approach to measuring a company’s short-term liquidity. Only the company’s most liquid assets are included in this calculation.
Cash Ratio Formula = (Cash + Cash Equivalents/Current Liabilities)
The current ratio, or quick ratio, compares a company’s total Cash and cash equivalents to its current liabilities. This statistic depicts how well the firm can pay off its short-term debt using its most liquid assets.
Noncurrent assets are long-term assets with a useful lifespan of more than one year and can’t readily be converted into Cash.
At acquisition cost, the assets are recorded on the balance sheet, including property, plant, and equipment; intellectual property; intangible assets; and other long-term investments.
Noncurrent assets are capitalized rather than expensed, with the value drawn down and allocated over the length of time that the purchase will be utilized.
Businesses purchase noncurrent assets for future use since their benefits last more than a year. Depending on the sort of asset, it may be amortized or depreciated.
Types of Noncurrent Assets
The following are the most important categories of non-current assets:
Tangible assets are tangible items owned by a firm and integral to its core operations with a physical form or property. The recorded value of a real asset is the original purchase price, less any depreciation accumulated since the acquisition.
Not all physical resources are depreciated, though. Assets such as land are kept at a cost even though they tend to rise in value. Depreciation is a non-cash way of writing down the value of an asset over time.
Intangibles are assets that have no physical presence but provide economic benefit to a business. Two intangible assets are goodwill and intellectual property, such as trademarks, patents, and copyrights.
Intangible assets can be purchased from another party or generated within the organization. The investments produced by the firm are not recorded in a book value because they lack a recognized value.
Therefore, not recorded on the balance sheet.
Indefinite and definite tangible assets are two different types of intangibles. Brand recognition is an example of an indeterminate intangible asset which stays with the firm as long as it survives. A certain tangible asset has a limited lifespan and only lasts for the duration of a contract or agreement.
A legal arrangement to utilize another company’s patents is an example of a firm’s intangible asset.
The company must operate the patent for an agreed length, and the inventor maintains ownership. Even though an intangible asset has no physical value, it may help a firm achieve long-term success.
Natural resources are natural assets that are derived from the earth. Timber, fossil fuels, oil fields, and minerals are natural resources. Natural resources are also known as wasting assets because they are utilized when used. The support must be extracted from the natural environment to be consumed.
A natural resource is a non-renewable, finite supply of something that naturally exists. For example, natural gas is a non-renewable natural resource that must be extracted. It implies the asset must be mined or pumped out of the ground before use.
Natural resources are recorded on the balance sheet at an initial cost plus exploration and development expenditures, with any residual depletion deducted.
Non-Current Assets Examples
The following are a few examples of noncurrent assets:
Property, Plant and Equipment
P&E are long-term physical assets that are a vital component of a company’s core operations and are utilized in the manufacturing or selling of other assets.
The assets are tangible and non-liquidised and do not come in cash form.
The total value of the property, plant, and equipment recorded on the balance sheet is less accumulated depreciation, which equals the full value of assets, less any accrued depreciation.
The cumulative amount of depreciation charged to an asset since it was put into use is known as accumulated depreciation. Investments in PP&E indicate that the firm may have future expansion.
Long-term investments are assets like bonds, stocks, and notes that investors purchase in the financial markets to increase value and provide in the future.
These assets are likewise shown on the firm’s balance sheet.
When one firm purchases another, goodwill is created. It is generated when the purchase price for the business exceeds the fair value of all identifiable assets and liabilities assumed in the transaction.
The goodwill is purchased for intangible assets such as a company’s reputation, brand name, excellent customer relationships, strong client base, and high-quality employees.
Current and non-current on the Balance sheet
|December 31, 2018||December 31, 2017|
|Property, Plant & Equipment||24,006.20||26,161.80|
|Other Noncurrent Assets||718.10||832.30|
|– Trade Receivables||1,245.90||889.70|
|– Cash and cash equivalents||15,987.70||14,476.90|
|– Bank Balances Other Than Cash and Cash Equivalents||112.90||97.30|
|– Other Financial Assets||524.90||427.90|
|Current Tax Assets||188.50||63.90|
|Other Current Assets||223.90||169.60|
|Equity and Liabilities|
|– Equity Share Capital||35,773.20||33,241.70|
|– Other Equity|
|Deferred Tax Liabilities (Net)||588.20||1,219.60|
|Other Non-Current Liabilities||5.10||6.00|
|– Trade Payables|
|– Total outstanding dues of micro-enterprises and small enterprises||107.70||52.50|
|– Total outstanding dues of creditors other than micro-enterprises and small enterprises||12,296.00||9,793.90|
|– Other Financial Liabilities||3,161.80||3,140.20|
|Other Current Liabilities||1,411.40||1,065.90|
What are examples of non current assets?
Investments, intellectual property, real estate, and equipment are examples of non current assets.
What are 3 types of current assets?
– Cash Equivalents.
– Marketable Securities.
– Accounts Receivable.
– Prepaid Expenses.
– Other Liquid Assets
How do you calculate non current assets?
Non current assets are valued mostly by deducting the accumulated depreciation from the original purchase price. A computer purchased for $2100 two years ago is a non current asset and is subject to depreciation.
What are the 3 Types of Non-Current Assets?
– Tangible Assets.
– Intangible Assets.
– Natural Resources.
If you found it complicated, feel free to book a free call with Alan Chen (A CPA with +20 years of expertise)