Current and Noncurrent Assets

Current and Noncurrent Assets

In every organization, accounting is an important fragment in the preservation of the company. It is vital for any business to understand assets and their importance to the accounting process because a business cannot operate successfully without assets. Two assets that are discussed in this paper are current and noncurrent. The paper will also examine and discuss the order of liquidity and how it applies to a company's balance sheet.

Current Assets

Current assets, also referred to as short-term, are cash or other resources that business' rationally anticipate to convert to money or use totally within one-year, or during an operating cycle, whichever is longer. Current or short-term assets include cash, receivables, short-term investments, pre-paid expenses, and inventories. The kinds of assets pointed out are vital to the company because the assets are a source of funds required for day-to-day operations (Alfredson, 2001).

Noncurrent Assets

Noncurrent or long-term assets are assets that a company expects to hold for at least one-year or longer and are not easily exchangeable to cash. Equipment, plant, property, natural resources (silver, mines, and gold, etc.), and intangible assets (licenses, trademarks, and patents, etc.) are multiple types of noncurrent assets. Noncurrent assets are essential to the financial stability of a company's operation and make available a reliable source of income.

Difference between Current and Noncurrent Assets

Current and noncurrent assets are different because of the length of time it takes a company to change the assets into form or cash. Short-term or current assets are that which are able to be used or sold within an operating cycle or one-year, and the assets do not depreciate within a year (Bowen, 2010). Contrary to short-term or current assets, noncurrent assets are long-term assets that cannot be liquidated within a company's operating cycle. For instance, if a company owns buildings or land as the center of its organization, the business is not going to convert the buildings or land into cash within the one-year period. In addition, noncurrent assets such as equipment and machinery will depreciate in value over time (Wiley, University of Phoenix, 2007).

Order of Liquidity and how it applies to the Balance Sheet

The accounting reporting regulations and rules require accountants to follow a particular order of liquidity when showing financial items on a company's balance sheet. The order of liquidity list items on the balance sheet according to how fast a business will take to sell, or convert into cash. The short-term or current assets are first in the order of liquidity. Cash and equivalents such as U. S. Treasury bills and money market funds are the first items to liquidate because companies can easily convert the items into cash (Bowen, 2010). Short-term investments such as marketable securities are the second items listed in the order of liquidity. For a company to generate cash, it can sell securities at any time. Accounts receivable are the third item listed and