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Classification of assets is based on two groups, current assets and non-current or long-term assets. If a property is convertible to cash easily within one calendar year or less, it is known as a Current asset. Resources that are of value and are liquid are all assets. Current assets are used to pay current liabilities. Examples of current assets include cash in hand, cash at bank, accounts receivable and inventory. Current assets are used to fund the day-to-day running of the business. On a balance sheet, under the assets column, the first item listed is current assets.
The current assets show the business how much money is available at a given time. Current assets are also known as the circulating asset. This is because items like inventory, accounts receivable and work in progress are constantly flowing in and out of the firm. If one company wants to lend to another, they normally check how much that company has in its current assets. Liquidation of Current assets is simple, that is changing them into cash.
On the other hand, property that is not easily convertible into cash is a Non Current asset. They include leasehold improvements, plant, land and equipment. The money invested in Non Current assets normally take more than one year to change to cash. They are not as liquid as current assets or short-term investments. The prices of Non Current assets may fluctuate. This means that the value stated on a balance sheet may be high or low. Non Current assets are more profitable compared to current assets. They have a higher risk since converting them into cash is not easy and requires more time. Their probability to fluctuate in value is also higher than current assets.
According to Morningstar, (2010) Non Current assets are also called fixed assets. They have along term useful life and a firm does not expect to sell them soon. A firm hopes to have them indefinitely as most of them are used for production. Fixed assets generally include property, plant and equipment (PP&E) or assets that are tangible. Another definition of Non Current assets is assets that cannot be sold to consumers or end users. The firm uses them for extended period. The tax levied on Non Current assets is lower than that levied on current assets. When using Non Current assets in generating revenue for the firm, it is important to determine the value of depreciation for the period in order to charge it on the total value of the asset.
According to Gurusofinvestment, (2007) Liquidity is the scale used to gauge how easily an asset can get converted to cash or near to its present value. Items in the balance sheet are arranged in order of nearness to cash or order of liquidity. That is an items ability or ease of converting to cash. The listing is from the most liquid to the least liquid item. The current assets therefore appear first in the balance sheet followed by the Non Current ones. Cash, which is the most liquid asset, appears first on the assets column. Items with the same degree of liquidity are arranged together on the balance sheet. The measure of success of a firm can be based on liquidity. It suggests that the firm has a sound accounting processes and has is in charge of over its internal cash flow.
Investors, stakeholders and banks evaluate the performance of the business by studying its liquidity. Arranging the things you own in order of liquidity gives one a clear picture of the assets that can quickly be turned to money or cash and which ones that cannot. The assets that you cannot easily change to cash are illiquid assets. If for instance you require some money at this moment, cash at hand, current or checking account and your savings account will be your first destination on that order. Items like the houses you own will be last on the list since they need more time to convert to cash.