Assets are resources a business owns that can be converted into cash. For accounting purposes, they are divided into two groups based on when the business expects they will be converted or sold. Current, or short-term, assets are expected to be sold within a year. A non-current asset, also known as a long-term asset, is expected to be held for more than a year before being converted. In reality, a non-current asset may never be sold for cash, because non-current assets are either things a business needs for normal operations or intangible items such as brand names, patents, and copyrights.
Non-current assets can be split into three main categories: property, plant and equipment (PP&E); long-term investments; and intangible assets. Property, plant and equipment assets are things such as buildings, furniture and factory equipment — items a business uses to operate. These non-current assets must be depreciated as they wear out and eventually need to be replaced. The current value of PP&E is represented by its purchase price minus depreciation.
Long-term investments can be things such as stocks and bonds, or loans made by the business. They are not categorized as short-term assets because either they cannot be easily converted into cash, as with a loan, or the intent is to hold them for a long time, as with stocks and bonds. The actual value of this type of non-current asset can vary daily, so the value recorded in the accounting books will often not match the real value.
Intangible assets are generally harder to quantify. There is no fixed purchase price like there is with PP&E assets, or definitive value like there is with long-term investments. These non-current assets cannot be touched, seen, or even inventoried, because they do not physically exist. Intangible assets are composed of items such as trade secrets, copyrights and general knowledge — all items that add value to a business.
For example, suppose an entrepreneur wants to start a strip mining business and is looking at purchasing one of two companies: Joe’s All-Purpose Mining and Sam’s Strip Mining. Joe’s has no experience with strip mining, while that is all Sam’s does. This would mean Sam’s has an intangible asset in the knowledge of strip mining and, all other things being equal, would be more valuable to the entrepreneur.
The most common type of intangible, non-current asset is goodwill. It represents a company’s reputation and can have a significant value. It can include everything from the value of a company's brand to employee morale and how it is perceived by everyone from customers to vendors.