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  Classifying Assets

Introduction to Classifying Assets

If the items on the statement of financial position are listed randomly along with assets at the top of the statement and equity and liabilities beneath, it can be confusing, although it may consist of all of the information and be mathematically accurate. To assist users to comprehend the information, it is generally available in a more organized manner; assets and claims are generally grouped into categories.

Assets might be classified as being either current or non-current.

CURRENT ASSETS

Basically assets that are held for the short term are termed as current assets. To be more exact, they are assets which meet any of the following conditions:

  • They are held for sale or consumption throughout the business's normal operating cycle;
  • They are accepted to be sold in the next year;
  • They are held mainly for trading;
  • They are cash, or near cash like easily marketable, short-term investments.

The operating cycle of a business is the time that is stuck between buying and/or creating a product or service and receiving the cash on its sale. For several businesses, it will be less than one year.

The general current assets are trade receivables (amounts owed for goods or services supplied on credit), inventories (stock), and cash. Possibly it is worth making indicate here that most sales made through several businesses are made on credit. This is to state that the goods pass to or the service is provided to the customer at one point but the customer pays afterwards. Retail sales are the only important exception to this point.

For businesses which sell goods, than provide a service, the current assets of inventories, trade receivables and cash are interconnected. They flow in a business as displayed in Figure 2.2. We can see that cash can be employed to buy inventories that are then sold on credit. While the credit customers (trade receivables) pay, the business receives an injection of cash and so on.

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Figure 2.2- the circulating nature of  current assets

For just service businesses, the situation is identical, apart from that inventories are not involved.

NON-CURRENT ASSETS

Non-current assets (also termed as fixed assets) are just assets that do not meet the definition of current assets. They are apt to be held for long-term operations. This difference among assets which are continuously circulating inside the business (current) and assets employed for long-term operations (non-current) might be useful while trying to assess the suitability of the mix of assets held. Several businesses will require a specific amount of both kinds of asset to operate efficiently. It is significant to understand that how a specific asset is classified (i.e. among current and non-current) may differ as per to the nature of the business. This is due to the purpose for which a specific type of asset is held may vary from business to business. For instance, a motor vehicle manufacturer will generally hold inventories of the finished motor vehicles created for resale; so it would classify them as part of the current assets. Alternatively, a business which uses motor vehicles for delivering its goods to customers (i.e. like part of its long-term operations) would categorize them as non-current assets.

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