Before explaining the non-current assets and current assets, let’s briefly discuss the definition of asset. What is an asset? Asset is a resource controlled by an entity from which the entity expects to obtain economic benefits in future.
Depending upon the nature of resources, accounting frameworks have classified assets into various types for better presentation and analysis. This classification of non-current assets and current assets is based on respective timelines or lives of the assets, i.e. the expected time in which the economic benefits associated with the assets will be fully realized.
Assets whose economic benefits are expected to be realized within a year are classified as current assets. In other words, if an entity expects to get the cash or equivalent benefit from an asset within one year, it will be classified as current asset. Some common examples of current assets are given below:
- Cash and bank balances
- Accounts receivable
- Prepaid expenses
- Advances to suppliers
All assets which cannot be classified as current assets fall in the category of non-current assets. These are long term assets whose full economic benefits are expected to be realized in at least more than one year. In other words, if an entity expects to get full cash or equivalent benefit from an asset in more than one year, it will be classified as non-current asset. There are non-current assets whose economic benefits are generated continuously over their useful lives, such as property, plant and equipment and intangible assets. Cost of such non-current assets is also charged to the statement of profit or loss over their useful lives to match the pattern of economic benefits (following matching principle), in the form of depreciation of property, plant and equipment or amortization of intangible assets.
Some common examples of non-current assets are given below:
- Property, plant and equipment
- Intangible assets
- Investment properties
- Long term investments
- Long term receivables
Purpose of separately presenting non-current assets and current assets
In the financial statements, non-current assets and current assets are shown separately. Purpose of doing so is to provide useful information to the users about the total assets of an entity. Working capital requirements of an entity are met by current assets. Liquidity position of an entity i.e. whether an entity will be able to pay its liabilities when they fall due is usually dependent on the current assets. So, this information is often important for the users of the financial statements.