Assets are categorised as either non-current or current, and while both contribute positively to your business, they generate profit in different ways. Current assets are considered short-term — they can be relatively quickly converted to cash. Non-current assets are longer-term investments, having a life of more than one year.
In this guide, we discuss why it’s important to understand how they differ, why they need to be separated and how to manage them effectively.
The difference between non-current and current assets
The key difference between non-current and current assets is how quickly your business can realise their value — which is also referred to as liquidity.
Current assets can be converted into cash in less than 12 months. These are also known as short-term assets.
Non-current assets’ value can't be realised until a period greater than 12 months. These are also known as long-term assets.
Why is it important to separate non-current and current assets?
Separating assets into these two categories is a critical step in the financial management of your business. It gives you a clear picture of which assets can be converted into cash within the year and used to fund your company’s immediate or current needs, and which assets will remain with your business beyond the year and can be used to fund long-term or future needs.
Non-current and current assets are also subject to differences when it comes to depreciation, taxation and valuation:
Depreciation
Non-current assets are usually subject to depreciation over time, with their value reducing gradually. Current assets don't depreciate but are subject to market value changes.
Taxation
Non-current assets are typically taxed as capital, whereas current assets are taxed as income.
Valuation
Non-current assets are valued by subtracting accumulated depreciation from the purchase price. Current assets are assessed by their market value.
What are non-current assets?
Also known as fixed assets, non-current assets are assets or property your business owns that can’t be converted into cash within 12 months.
They are a source of long-term revenue generation, are typically high-value and form the basis of your company’s long-term investments. Investing in non-current assets can help a business’s financial stability, as they cover future needs.
Non-current assets can’t be converted to cash within 12 months.
Examples of non-current assets
Non-current assets fall into two categories — tangible and intangible. Both can be difficult to convert to cash but have different attributes:
Tangible non-current assets
These are the main forms of assets for most industries and include physical property (buildings and land), equipment (machinery, tools and computer hardware), and vehicles (company cars, trucks and forklifts).
Intangible non-current assets
These are assets within your business that don’t have a physical form. While they provide value to your company, they can’t easily be converted to cash within 12 months. These include trademarks, patents, brand recognition, customer databases, goodwill, long-term investments, licences and permits.
The importance of managing non-current assets
Non-current assets are usually high-value, illiquid, long-term investments that help businesses generate revenue. Proper management of these assets can drive growth and profitability, setting your company up for long-term success. Managing non-current assets effectively enables companies to reap the benefits of:
Long-term growth
While they can be costly to acquire, the long-term benefits of non-current assets can be leveraged for years to come. This can lead to ongoing cost savings and increased profitability.
Increased business value
Non-current assets increase the overall value of a business, which can be beneficial when seeking investment. They can also be used as collateral to secure some loans.
Lower risks
Non-current assets can protect businesses from the risks of fluctuating market value which affects current assets. Strong non-current assets may be more financially stable and geared for sustainable growth.
What are current assets?
Current assets are resources used in your business’s day-to-day operations which you intend to own for less than 12 months. Current assets generate cash flow and can be used to cover expenses and run daily operations. They are also known as short-term assets since they’re typically converted into cash within the fiscal year.
Current assets can be converted to cash in less than 12 months.
Examples of current assets
Current assets can be put into two subgroups related to their liquidity. If they can be converted into cash in less than 90 days, they’re known as ‘more liquid’ current assets. Current assets that convert to cash in 90 days to 12 months are known as ‘liquid’ current assets.
More liquid current assets
Cash in hand is the most liquid asset of your business, followed by things like accounts receivable within 90 days and bank deposits.
Liquid current assets
Include inventory, raw materials, debts or invoices owed to you, prepaid expenses and short-term investments.
The importance of managing current assets
Current assets are important to manage as they cover immediate and short-term expenses for your business. They allow you to pay suppliers and employees and protect against unforeseen costs that may arise. Their main uses are:
Covering daily operations
Current assets such as cash and inventory ensure your daily business operations run smoothly.
Covering ongoing or routine expenses
Current assets provide the cash flow to cover expenses like rent and payroll.
Capital management
Provides working capital to help avoid cash flow problems.
Overall stability
A strong portfolio of current assets represents the liquidity of your business. It demonstrates your ability to meet financial obligations and fund sustainable growth.
Aiding decision-making
Keeping a close eye on your current assets helps you monitor the overall health of your business. You can spot trends and make decisions around pricing, resources and production.
Non-current assets and current assets: FAQs and resources
How do you record a non-current asset?
Non-current assets are reported on the balance sheet at the price paid, adjusted for depreciation.
How do you record a current asset?
Current assets are a balance sheet line item listed under the assets section.
Are current assets and total assets the same?
No, total assets account for both current and non-current assets. Therefore, current assets only account for one part of a business’s total assets.
Where do digital assets sit?
Emerging digital assets like cryptocurrencies and digital art fundamentally differ from the physical assets we’re accustomed to. Digital assets can be categorised as intangible current assets, as their value can be relatively quickly realised. These are still new and evolving asset classes that require collaboration with regulators.
Simplify your accounting with MYOB
Assets play a vital role in bringing value and success to your business, and current and non-current assets deliver this value in vastly different ways. Understanding and categorising these accordingly is a crucial accounting function, and it’s one that MYOB makes easy.
With accounting software central to every MYOB plan, you can choose the package that’s right for you. You can also add capability across all your key workflows (customers, employees, suppliers, projects, finance, accounting and tax) so you can manage your entire business in one place.
Simplify your accounting and manage your business more efficiently — get started with the MYOB business management platform today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your BAS return or annual tax statements then you should consult with your accountant or other registered tax adviser.