Understanding Current and Non-Current Assets in the Balance Sheet

In the world of finance and accounting, a balance sheet provides an essential snapshot of a company’s financial health. Among the most important components of the balance sheet are the assets, which are classified into two main categories: current assets and non-current assets. These classifications help businesses, investors, and analysts understand how a company’s resources are being utilized and the company’s ability to meet its short-term and long-term obligations.

What are Current Assets?

The company’s current assets are those that it can convert into cash within a specific financial year. To clarify, business processes in a specific year can absorb, trade, utilize, or deplete these assets.

These assets can be cash equivalents, cash, inventory (stock), tradeable assets, accounts receivable, and other liquid assets, i.e., assets that are easily convertible into cash with minimal loss in value. A balance sheet displays these elements based on their liquidity, prioritizing those easily convertible into assets.

Elements of Current Assets

Although cash and cash equivalents as well as liquid investments in marketable securities fall under the category of current assets, current asset categories also include the following:

• Inventory:

Raw materials, end products, and other similar components that the company maintains for future sales. On the other hand, under current assets, it’s hard to list the inventories, as some inventories can be non-liquid, depending on the industry type of the company.

• Accounts receivable:

The sum that is owing to the business for delivering items that consumers have not yet paid for is known as accounts receivable. Although in the case of a balance sheet, only the ones that the company is expecting to acquire in the accounting period are recorded.

Those businesses that indulge in the delivering of long-term credits to customers, a specific proportion of the accounts receivable will be ignored as a current asset.

• Prepaid expenses

This component shows the payments that the company is generating for goods and services that are planned to be obtained in the future. Since their expenditures have already been covered, they must be included in the present asset categorization even if they cannot be turned into cash.

Petty cash, cash at bank, cash in hand, cash advance, short-term staff loan, short-term investments, and so on are examples of current assets. A company’s overall asset type valuation may be obtained by simply adding up these assets.

What are Non-current Assets?

Non-current assets can be best described as the long-term investments or assets whose worth or value is not commonly recognized within the financial year. It is generally because these assets have low liquidity of being easily changed into money or money equivalents.

Usually non-current assets are capitalized and reserved. To explain further, a company tends to distribute the cost over the course of its use rather than focusing upon them for the year they were bought.

Moreover, these assets are documented in the firm’s balance sheet and are usually classified under PP&E (Property, Plant & Equipment), intellectual property, investment, and intangible assets, which require more long-term resources.

Commonly, businesses buy non-current assets to utilize them in their routine operations with the intention that they will last more than a year. Additionally, a non-current asset may be amortized, depleted, or depreciated, depending on its nature and use.

Elements of Non-Current Assets

The most important categories of non-current assets are highlighted in the following guidelines:

• Tangible assets

These assets, as their name implies, have a specific physical shape and typically have a limited monetary worth. Any tangible asset’s true worth may be quickly ascertained by deducting the asset’s depreciation from its current value.

It is important to remember that not all material possessions will eventually lose value. Land, for example, may increase in value with time. Additionally, physical assets are taken into consideration when determining a company’s net value since they are frequently essential to its fundamental operations.

• Intangible assets

Despite lacking a physical form, these assets are thought to be economically valuable to a business. These assets might be indefinite, meaning they last as long as a firm is in operation, or definite, meaning they have a predetermined shelf life.

Typical examples of intangible non-current assets include goodwill, patents, copyrights, trademarks, and intellectual property.

• Natural resources

These specific resources are easily accessible and basically come from the ground. They are also referred to as exhaustible or decaying assets. Natural resources are often listed on a business’s balance sheet at the purchase price. The cost of development, exploration, and cumulative depletion are then considered when registering them. The most prevalent types of natural resources include fossil fuels, minerals, and oil fields.

Questions to Understand your abilities

Q1.) Which of these best describes a current asset?

a) A long-term investment

b) An asset that can be turned into cash within a year

c) Something you can’t trade or sell

d) An intangible item like goodwill

Q2.) Which of the following is considered a non-current asset?

a) Petty cash

b) Accounts receivable

c) Land

d) Short-term investments

Q3.) What doesn’t belong in the current assets section?

a) Cash at bank

b) Inventory

c) Patents

d) Accounts receivable

Q4.) Non-current assets are usually treated as:

a) Prepaid expenses

b) Short-term investments

c) Capitalized and amortized

d) Debts or liabilities

Q5.) Which is a good example of an intangible asset?

a) Equipment

b) Inventory

c) Trademarks

d) Cash

Conclusion

In conclusion, current assets are those that a company can quickly convert into cash within a financial year, while non-current assets include long-term investments that are less liquid and provide value over an extended period. Both types play crucial roles in a business’s financial health, with current assets focusing on short-term liquidity and non-current assets supporting long-term operations and growth. Understanding these categories helps in effective financial planning and resource management.