In any corporation understanding appropriate accounting concepts is of vital importance. The correct understanding of current assests, non-current assests, the differences between current and no-current assets, and the order of liquidity are vital to the success of any organzation. The first step to understanding their importantce is to understand what each term includes.
According to Investopdedia, current assests include cash and other resources that are expected to turn to cash or to be used up within one year of the balance sheet date. It is important to note, if a company's operating cycle is longer than one year, an item is a current asset if it will turn to cash or be used up within the operating cycle. On the Balance sheet current assets are presented in the order of liquidity, i.e., cash, temporary investments, accounts receivable, inventory, supplies, prepaid insurance. They are included because they will allow the company to avoid paying cash for these items during the upcoming year. (http://www.studyfinance.com/lessons/finstmt/?page=11 ) It is important that the amount of each current asset not be exaggerated. For example, accounts receivable, inventories, and temporary investments should have valuation accounts so that the amounts reported will not be greater than the amounts that will be received when the assets turn to cash. This is important because the amount of company's working capital and its current ratio are computed using the current assets' reported amounts. Also not, current assets are refered to as short term assests. (Investopedia, 2014)
Investopedia lists, non-current assests as anything not classified as a current asset. The main line items in this section are long-term investments; property, plant, and equipment (PP&E); and goodwill and other intangible assets. Long-Term Investments. (http://simplestudies.com/difference-between-current-and-noncurrent-assets-liabilities.html ) A company's long-term investments, in the case that the full value will not be realized within the accounting year. Noncurrent assets are capitalized rather than expensed, meaning that the company allocates the cost of the asset over the number of years for which the asset will be in use, instead of allocating the entire cost to the accounting year in which the asset was purchased. Long-term assets are ones the company reckons it will hold for at least one year. Typical examples of long-term assets are investments and property, plant, and equipment currently in use by the company in day-to-day operations. (Invesotpedia, 2014)
The order of liquidity is the presentation of assets in the balance sheet in the order of the amount of time it would usually take to convert them into cash. Thus, cash is always presented first, followed by marketable securities, then accounts receivable, then inventory, and then fixed assets. Goodwill is listed last. In a business setting liquidity refers to a business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets and to such assests themselves. For assets, liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. A standard company balance sheet has three parts: assets, liabilities and owner equity. The main categories of assets are usually listed first, typically in order of liquidity. (http://news.morningstar.com/classroom2/course.asp?docId=145091&page=4 )
According to accounting tools, the order of liquidity concept results in a logical order to sort the assets listed in the balance sheet. For assets, liquidity means nearness to cash. For this reason cash is the first item on the balance sheet. After cash, the other current assets are listed in order of liquidity. Marketable securities (which can be converted to cash by selling them), accounts receivable (which may be factored), and finally inventories make up the rest of the current assets.
