Thanks to a top local group of CPAs in East San Diego for getting back to us with this answer to a reader's question regarding the classification of assets and liabilities on the balance sheet.
Overview: On the balance sheet, assets and liabilities are classified as either current or long term to indicate relative liquidity. Liquidity is a measure of how quickly items can be converted into cash.
Current assets: These assets can be expected to be converted into cash within the next twelve months or within the business's normal operating cycle if longer than a year. Cash, accounts receivable, notes receivable due within one year, and prepaid expenses are current assets. If a business is involved in merchandising (the sale of goods), the balance sheet contains an additional current asset - inventory. Any CPA firm would agree.
Long term assets: These assets include land, buildings, furniture and fixtures, machinery, and notes receivable due after one year.
Current liabilities: These are debts that are due to be paid within one year or within the normal operating cycle, if longer. Examples include notes payable, accounts payable and salaries payable.
Long-term liabilities: These liabilities, managed by accountants, are not classified as current. They consist of such items as mortgages notes payable, etc.
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