Long-Term Assets vs Current Assets
What Are Long-Term Assets?
Understanding Long-Term Assets
Long-term assets are those held on a company's balance sheet for many years. Long-term assets can include tangible assets, which are physical and also intangible assets that cannot be touched such as a company's trademark or patent.
There is no standardized accounting formula that identifies an asset as being a long-term asset, but it is commonly assumed that such an asset must have a useful life of more than one year.
Some examples of long-term assets include:
- Fixed assets like property, plant, and equipment, which can include land, machinery, buildings, fixtures, and vehicles
- Long-term investments such as stocks and bonds or real estate, or investments made in other companies.
- Trademarks, client lists, patents
- The goodwill acquired in a merger or acquisition, which is considered an intangible long-term asset
Changes observed in long-term assets on a companies balance sheet can be a sign of capital investment or liquidation. If a company is investing in its long-term growth, it will use revenues to make more asset purchases designed to drive earnings in the long run. However, investors must be aware that some companies will sell their long-term assets in order to raise cash to meet short-term operational costs or pay the debt, which can be a warning sign that a company is in financial difficulty.
What Are Current Assets?
Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business operations with one year. Current assets appear on a company's balance sheet, one of the required financial statements that must be completed each year.
Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current assets may also be called current accounts.
Understanding Current Assets
Current assets contrast with long-term assets, which represent the assets that cannot be feasibly turned into cash in the space of a year. They generally include land, facilities, equipment, copyrights, and other illiquid investments.
Current assets are important to businesses because they can be used to fund day-to-day business operations and to pay for ongoing operating expenses. Since the term is reported as a dollar value of all the assets and resources that can be easily converted to cash in a short period, it also represents a company’s liquid assets.
However, care should be taken to include only the qualifying assets that are capable of being liquidated at the fair price over the next one-year period. For instance, there is a strong likelihood that many commonly used fast-moving consumer goods (FMCG) goods produced by a company can be easily sold over the next year. Inventory is included in the current assets, but it may be difficult to sell land or heavy machinery, so these are excluded from the current assets.
Depending on the nature of the business and the products it markets, current assets can range from barrels of crude oil, fabricated goods, work-in-progress inventory, raw materials, or foreign currency.