What are differences between current and non-current assets or liabilities?
January 4, 2010
Balance sheets are usually arranged in a particular order whereby financial statement elements are categorized in subgroups. This arrangement facilitates review of the balance sheet information by interested parties. The categories (or subgroups) included in the classified balance sheet may be as follows:
Liabilities and Equity
Property, Plant and Equipment
Current Maturities of Long-term Debt
Deferred Tax Liability
Owner's (or Shareholder's) Equity
Of course, other categories may be presented on the balance sheet. For example, a category called Other assets or Other liabilities may be included in either current or non-current assets or liabilities, respectively.
As you can see from the table above, assets and liabilities are presented with current ones first followed by long-term ones. The difference between the current assets and liabilities is called working capital and is one of the liquidity measures of a company.
Let's review how current assets and liabilities differ from non-current ones.
Terms current and short-term are used interchangeably, and so are non-current and long-term.
Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed within one year of the balance sheet date or the company's operating cycle, whichever is longer.
Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities.
Operating cycle is the average time that is required to go from cash to cash in producing revenues.
Assets and liabilities which are not current fall into the non-current (long-term) assets and liabilities, respectively.
Normally, companies utilize one year in classifying assets as current or non-current because the operating cycle of such companies is shorter than a year. However, there are companies whose operating cycle is more than a year. For example, a cruise ship manufacturer may have an operating cycle longer than a year because it takes more time to build a ship (cash expenditures) and sell it (cash receipt). In such cases, the current versus non-current classification will be based on a period longer than a year after the balance sheet date.