Without assets, businesses could not function. In order to show how much a business owns assets are used in accounting to clearly define the positive side of a balance sheet. Current and non-current assets are not only cash, but also monies which will turn into cash in the future. This includes receivables, properties, work in progress and buildings. This paper will define current and non-current assets, differentiate between the two, the order of liquidity and how the order of liquidity applies to the balance sheet.
A current asset is defined as “receivables, inventory, work in process, or cash, that is constantly flowing in and out of an organization in the normal course of its business, as cash is converted into goods and then back into cash. In accounting, any asset expected to last or be in use for less than one year is considered a current asset” (Business Dictionary.com, 2011). Assets are important for businesses as they are a gauge of the businesses’ health along with liabilities and owner’s equity. The ability to list current and non-current assets separate shows the ability to create cash flow quickly or the possibility for longevity in positive cash flow for the future.
Non-current is defined as “not easily convertible to cash or not expected to become cash within the next year. Examples include fixed assets, leasehold improvements, and intangible assets” (Business Dictionary.com, 2011). Non-current assets are the long-term indicator for positive cash flow and can assist businesses when trying to acquire loans. The ability to show the ability for long-term cash flow is a positive indicator of the health of the business.
The major difference between current and non-current assets is the length of time it takes to convert the asset into cash. Current assets such as receivables usually turn into cash within 30 to 45 days, whereas it takes much longer to turn a non-current asset into cash. The time frame to...