Assets are resources owned by a business which are capable of converting into or producing monetary value. It is essential for every business to keep track of the value of its assets as against the value of its liabilities, to know where its finances stand. Assets are important to business as they are not only a source of future revenue generation but can also be liquidated to meet debts of the business.
This article looks at meaning of and differences between two different types of assets based on their liquidity – current assets and non-current assets.
Definitions and meanings
Current assets are those assets which are likely to be utilized in business activities resulting in their liquidation i.e., conversion into money, in a short period of time of under one financial year.
Current assets are important to a business as they are utilized to fund its working capital requirements. Every business requires money to meet day to day obligations that arise through its business operations. As current assets can be liquidated in a short period of time, they are crucial to management for tiding over its short-term funding requirements.
Examples of current assets include:
- Cash and bank balance
- Cash equivalents – investments which mature in under 3 months
- Accounts receivables – debtors which have a credit period of less than a year
- Stock – inventory which is expected to be sold or consumed within a year
What assets qualify as current assets depends on the business type as well. For example – Stock of grains for a grocery store can be expected to be sold within a year and would thus qualify as a current asset. On the other hand, a heavy machinery company may not expect to sell all its stock within a year and may thus not classify all its stock as current assets.
Noncurrent assets are assets which cannot be liquidated i.e., converted into money within a year. These assets generally have an enduring benefit for the business as they are capable of generating future revenue for the business.
Examples of non-current assets include:
- Tangible and intangible fixed assets – these fixed assets are utilized in revenue generating activities of the business. For example, plant and machinery used for manufacturing products, patents in favor of a business’s products etc.
- Investments – investments which are not short term in nature – they generate interest income as revenue. For example, long term investment in bonds of other economic entities, multiple year fixed deposits, locked in mutual fund investments etc.
Difference between current and noncurrent assets:
The main points of difference between current assets and noncurrent assets have been detailed below:
- Current assets are assets which can be converted into their monetary value within a short period of time i.e., between two consecutive accounting periods.
- Noncurrent assets are assets which cannot be converted into their monetary value within a year.
2. Holding time
- Current assets are held in the balance sheet for a period up to one financial year.
- Noncurrent assets are held for periods exceeding one financial year.
3. Ease of liquidity
- Current assets are relatively easier to liquidate.
- Noncurrent assets are tougher to liquidate.
4. Part of working capital
- Current assets are an important component of working capital of a business.
- Noncurrent assets do not form part of working capital of a business.
- Current assets are important for meeting day to day requirements of funds for a business.
- Noncurrent assets are important sources of revenue generation for a business.
- Current assets are generally valued at market value i.e.: the value that can be received on liquidation in the current market.
- Noncurrent assets are generally valued at their cost less any accumulated depreciation/amortization/impairment.
7. Tax consequences
- Sale of current assets is revenue in nature and results in tax on business profits for an entity.
- Sale of noncurrent assets is capital in nature and results in tax on capital gains/losses.
- Current assets include cash and its equivalents, stock and account receivables.
- Noncurrent assets include tangible and intangible assets and long term investments.
Current assets versus noncurrent assets – tabular comparison
A tabular comparison of current assets and noncurrent assets is given below:
|Assets which can be liquidated within one financial year
|Assets which do not get liquidated within one financial year
|Up to a year
|More than a year
|Ease of liquidity
|Part of working capital
|Funding day to day operations of a business
|Generating future revenue for a business
|Generally at market value
|Generally at cost less accumulated depreciation
|Sale results in tax on business profits
|Sale results in tax on capital gain/loss
|Cash and cash equivalents, inventories, debtors, prepaid expenses
|Tangible and intangible fixed assets and long term investments
Conclusion – current assets vs noncurrent assets:
Classification of assets into current and noncurrent assets is important for the management as well as for the investors to understand the true financial condition of a business. This information is of crucial importance for all stakeholders to take balanced and well informed economic decision.
It is the responsibility of the accountant to appropriately classify assets with reference to their nature and terms attached to them. It is further the responsibility of auditors to vet the classification of accountants to ensure an accurate classification and presentation of company’s assets.