An organization’s assets are categorized into two categories: current and noncurrent assets. In this article, we will explore the difference between the two and why it is important to identify them.
Current assets are the assets that can be converted into cash within twelve months or within one cycle of a business operation. Typically, these assets can be put up for sale, loaned out, consumed, or lent to generate value for the business quickly, to fund operating expenses, or to pay off any liability for the same fiscal year.
Examples of current assets include:
- Cash – Includes all types of cash, whether on hand or in the bank.
- Accounts receivable – Includes the amount of money to be collected in one operation cycle or one year.
- Inventory – Includes all production materials and the products that are for sale.
- Prepaid expenditures – Includes any expenses that an organization pays for in advance like insurance, office supplies, and rent.
Conversely, noncurrent assets or “long-term assets” are the assets that are expected to hold for a period longer than twelve months or one operating cycle. They are not readily convertible to cash.
There are three types of noncurrent assets. They are:
- Fixed assets – Includes the organization’s immovable assets such as the property, plant, and equipment (e.g. computers, machines, car, buildings, land).
- Intangible assets – Includes licenses, royalties, copyrights, trademarks, branding, intellectual property, and patents.
- Long-term investments – Includes stocks and bonds.
Current vs Noncurrent Assets
What, then, is the difference between current and noncurrent assets?
Current assets are those assets that can be easily converted into cash within one fiscal year. They can be sold, loaned out, lent, or consumed to generate money for the business’s daily operations or short-term liabilities. Examples of current assets are cash, inventory, accounts receivable, and prepaid expenses.
On the contrary, noncurrent assets are those assets that cannot be easily converted into cash so they cannot be used to fund the day-to-day business operations or pay off short-term liabilities. They hold for at least one fiscal year, which is why they are also called “long-term assets.” Examples of noncurrent assets are fixed assets, intangible assets, and long-term investments.
|Current Assets||Noncurrent Assets|
|Assets that can be converted into cash within twelve months or within one cycle of a business operation||Assets that are expected to hold for a period longer than twelve months or one operating cycle; also called “long-term assets”|
|Can be put up for sale, loaned out, consumed, or lent to generate value for the business quickly, to fund operating expenses, or to pay off any liability for the same period||Cannot be used to fund the business operations or pay off short-term loans because they are not readily convertible to cash|
|Examples include cash (e.g. cash on hand and cash in the bank), inventory (e.g. raw materials and goods for sale), accounts receivable (i.e. total amount of money to be collected), and prepaid expenses (e.g. rental, office supplies, insurance)||Examples include fixed assets (e.g. land, machinery, motor vehicles, computers, software), intangible assets (e.g. royalties, copyrights, patents, branding, trademarks), and long-term investments (e.g. stocks and bonds)|