Current and Noncurrent Assets Paper

Current and Noncurrent Assets Paper

According to "Current and Noncurrent Assets" (2011), "An asset is defined as any item of economic value owned by an individual or corporation, especially that which could be converted to cash" (para. 1). In accounting assets are considered either current or noncurrent. These assets are typically categorized based on their order of liquidity. This paper will define current and noncurrent assets, explain the differences between current and noncurrent assets, and demonstrate and define the order of liquidity and how the order of liquidity is applied to an organization's balance sheet.

Current Assets

Current assets are balance sheet items equivalent to the total of an organization's cash and cash counterparts, accounts receivable, inventories, short-term investments, prepaid expenses, and additional assets that can be transferred into cash in one-year or less. Current assets are essential to most organizations as a basis of finances for daily operations ("Current and Noncurrent Assets", 2011).

One of the most clearly recognizable forms of current assets is found in an organization's account receivables. According to "What are Current Assets?" (2011), "Account receivables refer to money owed by customers to an entity in exchange for goods or services that have been delivered or used, but not yet paid for" (para. 1). Customer's outstanding invoices are anticipated to be paid corresponding to the noted terms on the invoice. Because compensation of outstanding invoices is anticipated to occur in one-year or less, outstanding receivables are an ideal example of current assets ("What Are Current Assets?", 2011).

Prepaid expenses are also a form of current assets for an organization. Occasionally prepaid expenses are overlooked as a current asset because its value will decrease throughout the year and will eventually be recorded as an expense in a process known as amortization. A prepaid expense, unlike a normal expense, is recorded as an asset on an organization's income statement because it signifies something of future worth to the organization. For example, an organization could pay for one year of services from an insurance company as a means to bypass making monthly payments to the company. In this case the prepaid expense will be carried to the balance sheet and can be justifiably regarded as a current asset if the entire prepaid amount will be expended within one calendar year ("What are Current Assets?", 2011).

Noncurrent Assets

Noncurrent assets are assets an organization plans on retaining for a minimum of one calendar year. During that year the asset is not sold or exchanged and is reserved and recorded in the organization's accounting and tax records. Noncurrent assets include goodwill, investments in another company, brand recognition, intellectual property, property, plant, and equipment, and other intangible assets. Organizations frequently retain a number of noncurrent assets as part of the operational structure of the business ("What are Noncurrent Assets?", 2011).

One example of a noncurrent asset is long-term investments. Money invested in bonds with terms longer than one-year or purchasing the stock of another organization can be considered a noncurrent asset. A long-term investment appears on the asset side of an organization's balance sheet and signifies investments that the organization intends to retain for more than a year. These assets do not have the liquidity of short-term investments or cash ("What are Noncurrent Assets?", 2011).

Goodwill, another noncurrent asset, is an intangible asset considering it cannot be physically touched or converted into cash. This asset is seen in an organization's balance sheet and typically denotes the value of intangible assets such as the value of the company's name and reputation, its customer relations, employee relations, and any proprietary technology or patents. Goodwill is also created when an organization pays a premium price to acquire another business. Accountants subtract the purchase