In financial accounting, assets are the resources that a company requires in order to run and grow its business. Assets are divided into two categories: current and noncurrent assets, which appear on a company's balance sheet and combine to form a company's total assets.
Current and Noncurrent Assets as Balance Sheet Items
The portion of ExxonMobil's balance sheet pictured below displays where you may find current and noncurrent assets.
- Current assets generally sit at the top of the balance sheet. Here, they are highlighted in green, and include receivables due to Exxon, along with cash and cash equivalents, accounts receivable, and inventories.
- Noncurrent assets are listed below current assets. These are highlighted in blue, and represent Exxon's long-term investments like oil rigs and production facilities that come under property, plant, and equipment (PP&E).
- The combined total assets are highlighted in yellow.
Source: SEC ExxonMobile Form 10Q.
Understanding Short and Long-Term Assets
You may think of current assets as short-term assets, which are necessary for a company's immediate needs; whereas noncurrent assets are long-term, as they have a useful life of more than a year.
Current assets are considered short-term assets because they generally are convertible to cash within a firm's fiscal year, and are the resources that a company needs to run its day-to-day operations and pay its current expenses. Current assets are generally reported on the balance sheet at their current or market price.
Current assets may include items such as:
- Cash and cash equivalents
- Accounts receivable
- Prepaid expenses
- Marketable securities
Cash and equivalents (that may be converted) may be used to pay a company's short-term debt. Accounts receivable consist of the expected payments from customers to be collected within one year. Inventory is also a current asset because it includes raw materials and finished goods that can be sold relatively quickly.
Another important current asset for any business is inventories. It is important for a company to maintain a certain level of inventory to run its business, but neither high nor low levels of inventory are desirable. Other current assets can include deferred income taxes and prepaid revenue.
Noncurrent assets are a company’s long-term investments that have a useful life of more than one year. Noncurrent assets cannot be converted to cash easily. They are required for the long-term needs of a business and include things like land and heavy equipment. Noncurrent assets are reported on the balance sheet at the price a company paid for them, which is adjusted for depreciation and amortization and is subject to being re-evaluated whenever the market price decreases compared to the book price.
Noncurrent assets may include items such as:
- Property, plant, and equipment (PP&E)
- Long-term investments and goodwill—when a company acquires another company
Noncurrent assets may be subdivided into tangible and intangible assets—such as fixed and intangible assets.
Fixed assets include property, plant, and equipment because they are tangible, meaning that they are physical in nature; we may touch them. A company cannot liquidate its PP&E easily. For example, an auto manufacturer's production facility would be labeled a noncurrent asset.
Intangible assets are nonphysical assets, such as patents and copyrights. They are considered as noncurrent assets because they provide value to a company but cannot be readily converted to cash within a year. Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than a year.
How Current and Noncurrent Assets Differ: A Quick Look
Equal to cash or will be converted into cash within a year
Used to fund immediate or current needs
Items like cash and cash equivalents, short term investments, accounts receivables, inventories
Valued at market prices
Tax implications: Selling current assets results in the profit from trading activities
Current assets generally are not subject to revaluation; although in certain cases, inventories may be subject to revaluation
Will not be converted into cash within one year
Used to fund long-term or future needs
Items like long term investments, PP&E, goodwill, depreciation and amortization, long-term deferred taxes assets
Valued at cost less depreciation
Tax implications: Selling assets results in capital gains and capital gains tax is applied
Revaluation of PP&E is common—for instance, when the market value of a tangible asset decreases compared to the book value, a firm needs to revalue that asset