In two previous articles, current and noncurrent assets have been explained. If you have read through those articles, you may have noticed the differences between these two financial statements terms. For the sake of literacy, this article will discuss in detail the differences between these terms.
Four key differences
Current assets are generally assets that are less than one year. Noncurrent assets are available for more than one year.
This implies that to classify an asset as current, it should be available for use by the entity within a year. It may be available for two months, three months and so on.
But to qualify as noncurrent assets, such assets should be useful for more than a year. Assets available for two years can be classified as noncurrent.
Position in financial statement
Current assets are placed below noncurrent assets for a going concern business. However, this depends on the type of business. A business where cash is more important places current assets at the top of the financial position statement with cash as a first-line item. This type of presentation is called presentation in order of liquidity.
However, if cash is not that important as in non-banking entities, then, noncurrent is placed first with land and building as the first line item. This presentation is in order of permanence.
Examples of current assets are inventory, cash in hand, cash at bank, treasury bills, call account, unused stationeries, account receivables, among others.
Examples of noncurrent assets are land, buildings, motor van, motor car, plants and machinery, investments, goodwill, among others.
Cash flow capacity
The cash inflow from current assets is usually within a short time period. Noncurrent assets provide a long time period of cash flow.
This means that the income that can be generated from current assets are less than a year. For example, a stock inventory provides income to the business immediately the inventory is sold within the year.
Still, the income from noncurrent assets is for years to come. As long as it is in use, income will flow to the entity. A good example is a plant and machinery. As long as the machines are useful it will continue producing products for the entity.
To conclude, classifying assets as current and noncurrent is more time-bound than any other reasons. But for noncurrent assets, there are more ways to classify it. The next article will explain the meaning of PPE (Property, Plants and Equipment).