Accounting: Assets Classification

Assets

• Resources owned or controlled by a business
• Expected to generate future economic benefits
• Classified into:
  • Current assets: expected to be converted into cash or used up within one year or within the company's normal operating cycle
  • Non-current assets: expected to be used for more than one year or beyond the company's normal operating cycle

Current Assets

• Examples:
  • Cash
  • Accounts receivable (amounts customers owe the company)
  • Inventory
  • Prepaid expenses
  • Short-term investments
• Characteristics:
  • Expected to be converted into cash within one year or within the company's normal operating cycle
  • Highly liquid

Liabilities

• Debts or obligations that a business must pay or settle
• Classified into:
  • Current liabilities: expected to be paid or settled within one year or within the company's normal operating cycle
  • Non-current liabilities: expected to be paid or settled more than one year or beyond the company's normal operating cycle

Current Liabilities

• Examples:
  • Accounts payable (amounts the company owes to suppliers)
  • Short-term loans
  • Accrued expenses (salaries, taxes, etc.)
  • Unearned revenue
• Characteristics:
  • Expected to be paid or settled within one year or within the company's normal operating cycle
  • Require immediate attention

Non-Current Liabilities

• Examples:
  • Long-term loans
  • Bonds
  • Mortgage loans
• Characteristics:
  • Expected to be paid or settled more than one year or beyond the company's normal operating cycle
  • Do not require immediate attention

Equity

• Represents the ownership interest in a business
• Also known as net worth or shareholders' equity
• Increases when the company makes a profit and decreases when the company incurs a loss

Current Ratio

• Calculated by dividing current assets by current liabilities
• Formula: Current Ratio = Current Assets / Current Liabilities
• Interpreted as:
  • A higher ratio indicates a higher liquidity and ability to pay short-term debts
  • A lower ratio indicates a lower liquidity and ability to pay short-term debts

Assets

• Resources owned or controlled by a business, expected to generate future economic benefits
• Classified into:
  • Current assets: expected to be converted into cash or used up within one year or within the company's normal operating cycle
  • Non-current assets: expected to be used for more than one year or beyond the company's normal operating cycle

Current Assets

• Examples: cash, accounts receivable, inventory, prepaid expenses, short-term investments
• Characteristics: expected to be converted into cash within one year or within the company's normal operating cycle, highly liquid

Liabilities

• Debts or obligations that a business must pay or settle
• Classified into:
  • Current liabilities: expected to be paid or settled within one year or within the company's normal operating cycle
  • Non-current liabilities: expected to be paid or settled more than one year or beyond the company's normal operating cycle

Current Liabilities

• Examples: accounts payable, short-term loans, accrued expenses, unearned revenue
• Characteristics: expected to be paid or settled within one year or within the company's normal operating cycle, require immediate attention

Non-Current Liabilities

• Examples: long-term loans, bonds, mortgage loans
• Characteristics: expected to be paid or settled more than one year or beyond the company's normal operating cycle, do not require immediate attention

Equity

• Represents the ownership interest in a business
• Also known as net worth or shareholders' equity
• Increases when the company makes a profit and decreases when the company incurs a loss

Current Ratio

• Calculated by dividing current assets by current liabilities
• Formula: Current Ratio = Current Assets / Current Liabilities
• Interpretation:
  • Higher ratio: higher liquidity and ability to pay short-term debts
  • Lower ratio: lower liquidity and ability to pay short-term debts