Current and Noncurrent Essay
When an individual starts a business understanding financial statements are vital to tracking the company profits and losses. The company decisions are often decided by the figures and statistics. The figures are recorded and compared at a later date. Accounting knowledge is the core of the business and every aspect of a growing company depends heavenly on understanding the basic concept of debits and credits. Companies often develop departments that handle a large in flow of activity. The department keeps track of how well the business is performing and should be well staff with enough employees to fits the demands the company.
When making certain that the business financial operation is running smoothly knowledge of the difference between current and noncurrent asset should be explored. The organization must also understand the order of liquidity and how it applies to the balance sheet. The accounting department is always concern with the basic concept of assets. An asset is anything that the business owns or will own in the near future. Assets add worth to the business and often determine if the business will have success. Assets are broken down into two groups’ current assets and noncurrent assets.
According to Webster 2004, current asset is defined as “assets that will be sold, used up, or turned into cash within the current accounting period, usually one-year period. ” An example of current assets is cash, accounts receivable, supplies, and inventory. Current asset are listed on the financial balance sheet and represent incoming revenue and a future worth to the company. Noncurrent assets are asset that takes longer than an accounting cycle before turning into cash. Noncurrent resources generate profits for the company. An example of noncurrent assets is property, land, equipment, and vehicles.
Noncurrent asset also can be a long term investment, and intangible asset. The company may have a truck that the business may want to sell at a lower price or the business may use vehicle to deliver products sold. The truck use would bring cash to the company as a way of gaining revenue for the business. The main difference between current and noncurrent asset is how soon the asset can be turned into cash for the business. Current asset is normally sold within an accounting period and noncurrent asset usually takes over an accounting cycle before turning in cash.
The order of liquidity is also important when understanding the business financial statement. The order of liquidity plays a huge role when listing accounts on the company’s balance sheet. The order of liquidity is how the items are listed on the financial sheet. The balance sheet tells “one” how the business is operating at a specific time. The balance sheet includes the company resources and companies obligations. It also can be used to compare the current year to other years activity. The balance sheet is set up in a horizontal manner.
According to Investor word 2011, “order of liquidity is define as the organization of assets on the balance sheet based on how long the asset will take to turn into cash. ” The order of liquidity on the balance sheet is necessary to determining how quickly asset is changed into cash. The account is listed in a descending order of liquidity at the top of the list would be cash and follow by the next assets that are able to turn into cash swiftly. In conclusion, accounting financial statements are vital to the business. The company must have knowledge on how well the company is performing to make important decision.
When classifying what asset the business has the organization must know the difference between current asset and noncurrent asset. A current asset is an asset that can be used to purchase other material in small amount of time. A noncurrent asset normally does not convert to cash within an accounting cycle. The order of liquidity is decided by how quickly the company’s asset can turn into cash for the business. The greatest asset for the company is cash and is listed first on the balance sheet. The awareness of what assets are will give the business an accurate account of the business worth.
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