December 24, 2013
A balance sheet is a statement that summarizes the assets, liabilities, and shareholders’ equity at a specific point in time of a company (“Investopedia,” 2013). Balance sheets reflect financial health of a company at the end of a fiscal period. Assets are items of value to an organization and can be tangible, physical items or intangible items with no physical form. Assets are divided into two categories, current and noncurrent. Both are a vital part of a company’s financial statements. The following focuses on comparing and contrasting the two categories of assets.
Current assets are included on a company’s balance sheet. Current assets are “a balance sheet account that represent the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business” (“Investopedia,” 2013). These assets include “cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be readily converted to cash” (“Investopedia,” 2013). These assets are arranged on a balance sheet in descending order. Day-to-day operations and expenses are paid for with current assets. Current assets in personal finance include cash on hand and “anything of value that is highly liquid” (“Investopedia,” 2013).
Noncurrent assets are “long-term investments, in the case that the full value will not be realized within the accounting year” (“Investopedia,” 2013). They are capitalized instead of expensed. Noncurrent assets may be depreciated, amortized, or depleted. Noncurrent assets that depreciate include land, buildings, vehicles, and computers. Investments in other companies, goodwill, intellectual property, plant, and equipment are also examples of noncurrent assets. Intangible assets, such as patents, copyrights, and goodwill must be amortized. Depletion is “the actual physical depletion of natural resources by companies” (“Investopedia,” 2013). Noncurrent assets, like current assets, are also included on a firm’s balance sheet.
Differences between Current and Noncurrent Assets
Differences between current and noncurrent assets are noticed. Current assets can be turned into cash on hand in a short time as they are expected to be sold or consumed within one year. Noncurrent assets take much more time to convert to cash as they are not sold or consumed within one year. Current assets do not need to be allocated, but noncurrent assets must be as they are included on a balance sheet for a longer time. Noncurrent assets are assets that assist in producing products or services and in generating revenue and a future for the company. Current assets focus more on the firm’s customers, for example, inventory and accounts receivable. Another difference between current and noncurrent assets is the placement of each on the balance sheet. Current assets are shown first, followed by noncurrent assets. A company can estimate its current assets, the cash it will spend and receive, within one year. Therefore, current assets are listed first. Property, a noncurrent asset, is kept for several years; therefore, it is listed after current assets. This follows the order of liquidity.
The Order of Liquidity
The order of liquidity is defined as “the organization of assets on a balance sheet based on how long the asset will take to liquidate” (“Order of liquidity,” 2013). An order of liquidity begins with cash at the top, as it is the most liquid, followed by marketable securities, accounts receivable, inventory, fixed assets, and goodwill. The order of liquidity provides management as well as investors with the assets that can be easily turned into cash if and when the need should arise.
Application of The Order of Liquidity on a Balance Sheet Assets are presented on a balance sheet according to the amount…