Business Glossary

asset not expected to be converted into cash, sold, or exchanged within the normal operating cycle of the firm, usually one year. Examples of noncurrent assets include fixed asset, such as real estate, machinery, and other equipment; leasehold improvement; intangible asset, such as goodwill, patents, and trademarks; notes receivable after one year; other investments; miscellaneous assets not meeting the definition of a current asset. Prepaid expenses (also called deferred charges or deferred expenses), which include such items as rent paid in advance, prepaid insurance premiums, and subscriptions, are usually considered current assets by accountants. Credit analysts, however, prefer to classify these expenses as noncurrent assets, since prepayments do not represent asset strength and protection in the way that other current assets do, with their convertibility into cash during the normal operating cycle and their liquidation value should operations be terminated.

item lacking physical substance (e.g., goodwill) or representing a right granted by the government (e.g., patent, trademark) or by another company (e.g., franchise). Intangibles have a life in excess of one year. Limited life intangible assets are amortized into expense over the period benefitted. Unlimited life intangibles are subject to a yearly impairment test.

item that has physical substance and a life in excess of one year. It is bought for use in the operation of the business and not intended for resale to customers. Examples are building, machinery, auto, and land. Fixed assets with the exception of land are subject to depreciation. Fixed assets are usually referred to as property, plant, and equipment.

1. asset purchased for use in production over long periods of time rather than for resale. It includes (a) land, buildings, plant and equipment, mineral deposits, and timber reserves; (b) patents, goodwill, trademarks, and leaseholds; and (c) investments in affiliated companies.
2. in taxation, property held by a taxpayer, except cash, inventoriable assets, merchandise held for sale, receivables, and certain intangibles.
3. fixed asset usually consisting of tangible assets such as plant and equipment and intangible assets such as a patent.

cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.

cost already incurred that is deferred to the future. The deferral is made because of anticipated future benefit or because the charge constitutes an appropriate allocation of costs to future operations. The basic accounting convention applicable is the matching of costs and revenues. Deferred charges are classified as noncurrent assets because their life extends beyond one year. Deferred charges have no physical substance. Examples of deferred charges are: (1) start-up costs in putting into operation new, better, or more efficient facilities; (2) plant rearrangement and reinstallation costs; (3) moving costs from one location to another; and (4) deferred income tax charges resulting from interperiod income tax allocationNote that a company sometimes has discretion of whether to defer a cost and amortize or immediately expense it. An example is advertising expense, which is capitalized when the benefits to be gained will affect future years' income. Since deferred charges lack cash realizability and cannot be used to meet creditor claims, they are (when material) subtracted from assets in most ratio calculations.

In general: property with a relatively long life; fixed asset in a trade or business.
Taxation: property held for investment by the taxpayer that, when sold, has been subject to special tax treatment (as capital gains or capital losses). A net long-term capital gain is taxed at a maximum of 15% to an individual for sales after May 6, 2003. A 5% rate applies to individuals in the 15% tax bracket. A corporation is taxed at regular tax rates on capital gains. Inventory, property held for resale, real or personal property used in a trade or business, copyrights in certain instances, and certain U.S. government obligations are not capital assets.

The Internal Revenue Code does not define what a capital asset is-only what it is not (IRC § 1221). Also the tax code definition of capital asset differs significantly from the definition in economics.

current asset that can be converted into cash in a short period of time. Examples are cash, marketable securities, and accounts receivable. Certain current assets, such as inventory and prepaid expenses, are excluded.

item having a life of one year or less, or the normal operating cycleof the business, whichever is greater. For example, if a construction company's operating cycle is three years because it is engaged in long-term construction activities, it would show as current assets items having up to a three-year life. However, in almost all cases, the one-year cutoff is used. Examples of current assets are cash, marketable securities, inventory, and prepaid expenses.

item that has physical substance and a life in excess of one year. It is bought for use in the operation of the business and not intended for resale to customers. Examples are building, machinery, auto, and land. Fixed assets with the exception of land are subject to depreciation. Fixed assets are usually referred to as property, plant, and equipment.