For any business, properly categorizing assets is crucial for accurate financial reporting and effective decision making. Assets are broadly divided into two main classes – current assets and non-current assets. Though related, these two asset types have distinct definitions, valuations, and implications for a company’s finances. Below is a comprehensive overview explaining the key differences between current and non-current assets.
What are Current Assets?
Current assets represent cash and other resources that can reasonably be expected to be converted into cash, sold, or consumed within one year or one operating cycle They are included under the current section of a company’s balance sheet and are typically listed in order of liquidity.
Some examples of common current assets include:
- Cash and cash equivalents
- Short-term investments
- Accounts receivable
- Inventory
- Prepaid expenses
- Other liquid assets
Cash and cash equivalents refer to cash in the bank, cash on hand, and liquid investments like money market funds or short-term certificates of deposit. These current assets are already cash or can be converted to cash instantly.
Accounts receivable refer to money owed to the company by customers for goods or services delivered. This amount is expected to be received within the next 12 months or operating cycle.
Inventory includes raw materials, work-in-progress goods, and unsold finished products. These items are current assets because they will be sold as part of the normal business cycle.
Key Things to Know About Current Assets
- Convertible into cash within one year or operating cycle
- Most liquid assets such as cash, marketable securities
- Used to pay short-term liabilities and current expenses
- Changes with business operating cycles and seasons
- Includes accounts receivable, inventory, prepaid expenses
- Found at the top of the balance sheet
What are Non-Current Assets?
Non-current assets also known as long-term assets, represent investments that provide economic value for longer than one year. These assets are reported under the non-current section of the balance sheet and are listed after current assets in decreasing order of liquidity.
Some examples of common non-current assets include
- Property, plant, and equipment (PP&E)
- Long-term investments
- Intangible assets like patents and trademarks
- Goodwill
- Deferred tax assets
PP&E refers to tangible assets like land, manufacturing equipment, company vehicles, computers, office furniture, and buildings. These assets have useful lives of more than one year.
Long-term investments include assets that a company does not expect to convert into cash within the next year such as bonds, notes, and stocks held for the long run.
Intangible assets lack physical substance but provide long-term economic value such as brand recognition, intellectual property, and goodwill.
Key Things to Know About Non-Current Assets
- Not easily convertible to cash within one year
- Less liquid assets like PP&E, intellectual property, goodwill
- Used to generate revenue and profits for many years
- Changes slowly based on long-term business cycles
- Includes long-term investments, land, buildings, equipment
- Found below current assets on the balance sheet
Comparing Current vs. Non-Current Assets
While current and non-current assets are both vital for business operations, they serve different purposes. The following key differences distinguish these two asset categories:
Liquidity
- Current assets are highly liquid.
- Non-current assets lack liquidity.
Convertibility
- Current assets convert to cash within 12 months.
- Non-current assets take over 1 year to convert.
Usability
- Current assets fulfill short-term needs.
- Non-current assets serve long-term needs.
Valuation
- Current assets use market or fair value.
- Non-current assets use historical cost.
Balance Sheet
- Current assets are listed first.
- Non-current assets come after.
Examples
- Cash, accounts receivable, inventory
- PP&E, intangibles, long-term investments
Understanding these distinctions is essential for accurate accounting and financial statement analysis. Both categories provide value to the company but in different ways over different time horizons.
Current vs. Non-Current Assets Example
Below is an abridged snapshot of Apple Inc.’s balance sheet as of September 25, 2021 showing both current and non-current assets:
Apple Inc. Condensed Balance Sheet
| Assets |
|---|
| Current Assets: |
| Cash & cash equivalents |
| Short-term marketable securities |
| Accounts receivable, net |
| Total Current Assets |
| Non-Current Assets: |
| Long-term marketable securities |
| Property, plant & equipment, net |
| Goodwill |
| Other intangible assets, net |
| Total Non-Current Assets |
| Total Assets |
This condensed balance sheet snippet shows the composition of Apple’s current and non-current assets. Current assets like cash, receivables, and short-term securities total $65.8 billion. Non-current assets like long-term securities, PP&E, and intangibles total $152.7 billion.
Key Takeaways
- Current assets fuel daily operations. Non-current assets provide long-term infrastructure.
- Current assets are highly liquid. Non-current assets lack liquidity.
- Current assets appear atop the balance sheet. Non-current assets appear below.
- Both asset types are vital for smooth financial management and valuation.
For any company, properly classifying assets is crucial for reporting, planning, and decision making. Distinguishing between current and non-current assets based on their key differences allows financial analysts and investors to better understand the business’s workings and prospects.
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Current vs Non Current Assets – Explained Simply!
What are the differences between current and non-current assets?
Assets are resources for a business; assets are of two types, namely current assets and non-current assets. Current assets are equivalent to cash or will get converted into cash within a time frame of one year. Non-current assets are those assets that will not get converted into cash within one year and are noncurrent.
What criteria are used to classify an asset as current or non-current?
Current assets are considered to be cash equivalent and are inclusive of assets that enable the company to run its daily operations as well as to pay for the daily expenses. Noncurrent assets, on the contrary, are categorized as long-term investments by a company, and their useful lives extend to more than a year.
How do current assets and non-current assets impact a business?
Change in current assets affects the cash flow from operating activities, and changes in the noncurrent assets affect the investing activities of the business. Let’s look at the top 7 Comparison between Current Assets vs Non-Current Assets Current Assets can be further split into Quick Assets and Not-So-Liquid Assets.
What types of assets are considered current assets?
Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. The Current Assets account is important because it demonstrates a company’s short-term liquidity and ability to pay its short-term obligations.
