In this perspective, current assets are assets within the organization that are convertible to cash within a period of 12 months. They are mostly renowned for their high liquidity. Current assets are included in the balance sheet after the noncurrent assets. They are important in measuring the liquidity of an organization. When compared to current liabilities, they show the liquidity position of the organization. Therefore, current assets play an important role in the organization by helping to determine its cash flows in a given period of time. Every organization requires current assets in its routine activities. The performance of the organization primarily depends on the utilization of the current assets. Current assets are mainly the inventory in the organization which can be finished goods, work in progress or raw materials. Other current assets include, account receivables, short term investment, cash at bank, cash in hand and prepayments. The arrangement of these current assets in the balance sheet is based on the order of liquidity. Current assets have a maturity period of 12 months. They are routine and repeat themselves in every accounting period.
On the other hand, noncurrent assets are assets of the organization that their maturity period is over 12 months. They are also known as fixed assets in some accounting books. Noncurrent assets are basically the long term assets in the organization that are not convertible to cash within a short period of time. In the balance sheet, they are subjected to depreciation over the period of their maturity. The depreciation is used to match the value of these assets with the prevailing market value. Therefore, it is evident that, these assets undergo capital loss. The capital loss charged by the organization on a given non-current asset depends on the depreciation policy of the organization. Several depreciation policies used includes the straight line method, reducing balance method and actuarial method. Noncurrent assets show the solvency position of an organization. They measure the operation period of the organization.
In the comparison, of current and noncurrent assets of a given organization, the following is evidenced. Both current and noncurrent assets are used in the organization in order to achieve its performance goals. Every organization measures its performance and activity level using is total assets. The performance is measured in terms of ratio, and the common ratio used is the asset turnover ratio. Both current are used to meet the organization current and noncurrent maturing obligations when they fall due for payment. Therefore, both current and noncurrent assets form the basis of the going concern of the organization. They are crucial for the operation of the organization.
Thus, the differences between current and current assets are as follows; current assets have a shorter maturity period than noncurrent assets. Their maturity period is within one year but, noncurrent is over one accounting period. The value of current is usually smaller than noncurrent assets. Current assets are used to measure liquidity position of an organization whereas noncurrent assets are used to measure the solvency position of the organization. Current assets are arranged in the order of liquidity starting with the lowest liquid asset to the highest liquid asset which is not the case in noncurrent assets. Noncurrent assets are subject to depreciation in every accounting period, but current assets are not depreciated over their accounting period .
Accordingly, the liquidity measures the ease at which an asset can be converted to cash. The liquidity position of an organization is measured using the current assets of the organization. This is done using the liquidity ratio which includes the current ratio and quick ratio. The order of liquidity is based on the time required for a particular asset to be converted to cash. Those assets, which are convertible to cash over a short period, are said to be more liquid than those which takes a long period. For instance, cash in the bank is more liquid than accounts receivable. This is because, it takes a shorter period for an organization to obtain cash from a bank than from accounts receivable. Therefore, it is clear that, the order of liquidity is based on the time taken for an asset to be converted to cash.
In a nutshell, the order of liquidity of assets in the balance sheet is basically in two ways. The current assets can be arranged from the most liquid to the least liquid or from the least liquid, to the most liquid. It depends with the accounting policy followed by the organization. The commonly used form of arrangement by most organizations is the one of the least liquid, to the most liquid. This means that, current assets that are not liquid are arranged first followed by the others in the order of their liquidity. The arrangement of current assets of the organization depends on the ease at which that particular organization can convert the asset to cash. This means that, every organization has its own current assets, but some are similar in many organizations.
References
Andrew, G. (2010). Financial Management; Principles and Practice. New York: Freeload Press, Inc.
Berry, A., Jarvis, P., & Jarvis, R. (2005). Accounting In A Business Context. New York: Cengage Learning EMEA.
Chandra, P. (2008). Financial Management (7 ed.). New York: Tata McGraw-Hill Education.
