Answer to Question #87864 in Accounting for Nhlaphu

Question

Indicate why differentiation is made between current assets and non-current assents?

Answer 1

The differentiation between current and non-current assets is made due to their liquidity and the period of their use. These assets are sequenced in the balance sheet in the order of their liquidity.

Current assets are short term assets which may include cash, cash equivalents, inventory, accounts receivables, marketable securities, prepaid expenses; which are easily convertible into cash and are to be used in the current financial year to pay off the current liabilities. Current assets play an important role in ascertainment of working capital and present financial viability in respect of its operating activities.

On the other hand, non-current assets consist of the assets other than current assets which may include land & building, property, plant, long term investment which are acquired by the way of capital expenditure and are meant for long term use in the business and may further be categorized into tangible and intangible assets. The non-current assets show the actual worth of the business entity but have more risky than current assets due to possibility of decline in their value and their obsolescence during their long period of holding with poor liquidity in addition.