1.3 Current & Noncurrent Assets & Liabilities
In accounting, we classify assets based on whether or not the asset will be used or consumed within a certain period of time, generally one year. If the asset will be used or consumed in one year or less, we classify the asset as a current asset. If the asset will be used or consumed over more than one year, we classify the asset as a noncurrent asset.
Another thing you might have recognized when reviewing assets is that not all of the items were something you could touch or move. Those you can touch are known as tangible assets. Not all assets are tangible. An asset could be an intangible asset, meaning the item lacks physical substance—it cannot be touched or moved. Take a moment to think about your favorite type of shoe or a popular type of farm tractor. Would you be able to recognize the maker of that shoe or the tractor by simply seeing the logo? Chances are you would. These are examples of intangible assets, trademarks to be precise. A trademark has value to the organization that created (or purchased) the trademark, and the trademark is something the organization controls—others cannot use the trademark without permission.
Similar to the accounting for assets, liabilities are classified based on the time frame in which the liabilities are expected to be settled. A liability that will be settled in one year or less (generally) is classified as a current liability, while a liability that is expected to be settled in more than one year is classified as a noncurrent liability.
Examples of current assets include accounts receivable, which is the outstanding customer debt on a credit sale; inventory, which is the value of products to be sold or items to be converted into sellable products; and sometimes a notes receivable, which is the value of amounts loaned that will be received in the future with interest, assuming that it will be paid within a year.
Examples of current liabilities include accounts payable, which is the value of goods or services purchased that will be paid for at a later date, and notes payable, which is the value of amounts borrowed (usually not inventory purchases) that will be paid in the future with interest.
Examples of noncurrent assets include notes receivable (notice notes receivable can be either current or noncurrent), land, buildings, equipment, and vehicles. An example of a noncurrent liability is notes payable (notice notes payable can be either current or noncurrent).
Why Does Current versus Noncurrent Matter?
At this point, let’s take a break and explore why the distinction between current and noncurrent assets and liabilities matters. It is a good question because, on the surface, it does not seem to be important to make such a distinction. After all, assets are things owned or controlled by the organization, and liabilities are amounts owed by the organization; listing those amounts in the financial statements provides valuable information to stakeholders. But we have to dig a little deeper and remind ourselves that stakeholders are using this information to make decisions. Providing the amounts of the assets and liabilities answers the “what” question for stakeholders (that is, it tells stakeholders the value of assets), but it does not answer the “when” question for stakeholders. For example, knowing that an organization has $1,000,000 worth of assets is valuable information, but knowing that $250,000 of those assets are current and will be used or consumed within one year is more valuable to stakeholders. Likewise, it is helpful to know the company owes $750,000 worth of liabilities, but knowing that $125,000 of those liabilities will be paid within one year is even more valuable. In short, the timing of events is of particular interest to stakeholders.