Think about a glass of water and a tray of ice cubes. The water is fluid, ready to flow at a moment’s notice. The ice cubes, while still water, are frozen and will take time to melt.
For businesses, current assets are like the glass of water. They are ready to move and can be used to pay for the business’s immediate needs. Non-current assets are more like ice cubes: it takes time to access their value.
Let’s dive into the meaning of current or “liquid” assets and their role in keeping a company’s finances flowing smoothly.
What are current assets?
A current asset, also known as a liquid asset, is any resource a company could use, turn into cash, or sell within a year. This includes cash in the bank, money that customers owe (accounts receivable), goods ready to be sold (inventory), and other investments that can be easily offloaded. Current assets are a company’s quick cash reserve, ready to cover short-term bills or expenses.
What are non-current assets?
In contrast, non-current assets are resources with a longer life span, usually more than a year. They cannot be easily converted into cash within a short timeframe. Non-current assets include property, manufacturing equipment, long-term investments, and patents and trademarks.
It’s important to know the difference between types of assets because it affects how they’re shown on a balance sheet. A balance sheet is a snapshot of a company’s financial health at a particular moment. It has three main parts: assets, liabilities, and equity.
On a balance sheet, assets are listed in order of how quickly they can be turned into cash, also known as asset liquidity. Current assets, being the quickest to convert into cash, are listed first. So, if a company needs to pay bills or make immediate investments, it’s the current assets they’ll look. That’s why keeping a healthy amount of current assets helps a business run smoothly.
7 types of current assets
While cash is the most obvious current asset, it’s not the…
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