Sort assets (other than deferred assets) and liabilities into current and non-current by whether they fall within one year of the balance sheet date and whether they sit in the flow of core business transactions.
Divide the non-current assets a company uses over a long period into tangible and intangible by whether they have physical form, and explain the idea behind depreciation.
Explain how deferred assets, which carry already-paid expenses forward as assets, differ from other assets.
Current assets (流動資産) are the asset category that groups items in the flow of core business transactions and items that will turn into cash within one year of the balance sheet date.
Cash and deposits
Merchandise (inventory)
Accounts receivable
Cash and deposits (after collection)
Once payment is received, the receivable disappears and the money returns to cash and deposits.
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Typical examples are cash and deposits (現金預金), accounts receivable (売掛金), the right to collect payment later for goods already sold, and inventories (棚卸資産) such as merchandise held for sale. These change form as they move through the core business cycle of buying, selling and collecting payment, and end up as cash again. Assets outside that cycle are sorted by whether they turn into cash within one year of the balance sheet date, an approach called the one-year rule (1年基準).
AnalogyLike a greengrocer who uses the day's takings to buy vegetables, which then sell and become money again, this is property that keeps circulating through the shop.
Exam points
ExamAccounts receivable (売掛金) arise when a sale is recorded and disappear when payment is collected. Merely receiving an order does not yet create a receivable.
Mix-upAssets in the core business flow, such as merchandise and receivables, count as current assets (流動資産) even if turning them into cash may take more than a year. The period alone does not decide the category.
Non-current assets (固定資産) are the asset category for items outside the flow of core business transactions that are held for more than one year from the balance sheet date.
Non-current assets
Tangible fixed assets
Land
Buildings, machinery
Intangible fixed assets
Patents
Software
Investments and other assets
Shares held long-term
Non-current assets that lose value as they are used, such as buildings and machinery, are not expensed all at once in the year of purchase; instead the cost is spread over each year of the expected period of use (the useful life, 耐用年数). This procedure is called depreciation (減価償却). Within non-current assets, items are shown separately, for example as tangible fixed assets (有形固定資産) with physical form and intangible fixed assets (無形固定資産) without it.
AnalogyLike a house or a car, property you keep for years rather than selling soon.
How to remember“Fixed” (固定) means set in place and not moved.
Exam points
ExamNon-current assets (固定資産) that lose value through use, such as buildings, machinery and business software, are recorded as assets when bought and turned into expenses bit by bit through depreciation (減価償却) over the period of use.
Mix-upEven for the same shares, those held for the long term go into non-current assets (固定資産) as investments and other assets (投資その他の資産), while those held short-term to profit from trading go into current assets (流動資産).
Tangible assets (有形資産) are non-current assets with physical form, such as land, buildings and machinery, and appear on the balance sheet as tangible fixed assets (有形固定資産).
Straight-line method
Declining-balance method
Expense each period
The same amount every period
Largest in the early years, falling year by year
Basis of calculation
Divide the total to be depreciated evenly by the useful life
Multiply the balance not yet depreciated (the undepreciated balance) by a set percentage (the depreciation rate)
Two representative ways to calculate depreciation are the straight-line method (定額法) and the declining-balance method (定率法) shown in the figure. Land, on the other hand, is not depreciated, because it is not considered to lose value through use.
AnalogyAmong the things a shop keeps using for years, the ones you could photograph, like the shop building or the kitchen equipment.
Exam points
ExamUnder the declining-balance method (定率法), this year's depreciation expense (減価償却費) is the undepreciated balance (未償却残高), meaning the acquisition cost (取得原価) minus accumulated depreciation (償却累計額) through last year, multiplied by the depreciation rate (償却率).
Mix-upEven a physical item, if it is merchandise held for sale, goes into current assets (流動資産) as inventory (棚卸資産), not into tangible fixed assets (有形固定資産).
Intangible assets (無形資産) have no physical form but are used over a long period to generate revenue, and appear on the balance sheet within non-current assets as intangible fixed assets (無形固定資産).
They include legal rights such as patents and trademarks, software, and goodwill (のれん), the amount paid above the target's net assets when acquiring a company. Most are recorded as assets and then amortized over several years.
AnalogyProperty you cannot hold in your hand, like the rights to an invention or business software, that you pay for and then use for years to earn money.
Exam points
ExamSoftware bought for use in the company's own operations is recorded as an intangible fixed asset (無形固定資産) and amortized using the straight-line method (定額法).
Deferred assets (繰延資産) are items where expenses already paid, whose benefit extends into future periods, are carried forward as assets into the next period and beyond.
Pay the expense
Record as a deferred asset
Amortize over the periods
The recorded amount is amortized over the periods that benefit, moving into expenses little by little.
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Typical examples are organization costs (創立費) incurred when forming a company and start-up costs (開業費) for preparing to begin operations. Both have already been paid, but are considered to keep benefiting the business afterward.
AnalogyThink of the money spent getting ready before opening not as a cost of opening day alone, but as something the following years of business share bit by bit.
How to remember“Kurinobe” (繰り延べ) means pushing something back. Because expensing is pushed back to later periods, these are deferred assets.
Exam points
Mix-upDeferred assets (繰延資産) are not a subcategory of non-current assets (固定資産) but a separate category standing alongside current assets (流動資産) and non-current assets in the assets section.
Mix-upBecause deferred assets are paid expenses carried forward, they cannot be sold for cash. This sets them apart from most assets, which can be converted to cash by selling them.
Current liabilities (流動負債) are the liability category that groups debts arising from core business transactions such as purchasing and debts due for payment within one year of the balance sheet date.
Typical examples are accounts payable (買掛金), the obligation to pay later for goods purchased, along with notes payable, short-term borrowings and other payables. Items that arise outside core business transactions, such as short-term borrowings and other payables, are classified as current or non-current by the one-year rule (1年基準).
AnalogyLike a greengrocer's promise to pay for the vegetables it bought in one lump at the end of the month, a debt that arises in the course of running the business and is paid soon.
Exam points
ExamThe current ratio (流動比率) is current assets (流動資産) divided by current liabilities (流動負債), multiplied by 100 and expressed as a percentage. The higher it is, the more room the company has to cover near-term debts with assets close to cash.
Mix-upAccounts receivable (売掛金) are a right to receive payment, so they are current assets (流動資産), while accounts payable (買掛金) are an obligation to pay, so they are current liabilities (流動負債).
Non-current liabilities (固定負債) are the liability category for debts that arise outside core business transactions and fall due more than one year after the balance sheet date.
Typical examples are long-term borrowings (長期借入金), bonds (社債) that a company issues to borrow money from investors, and the provision for retirement benefits (退職給付引当金) set aside for employees' future retirement pay. Even for long-term borrowings, the portion due for repayment within one year of the balance sheet date is moved to current liabilities.
AnalogyLike a home loan repaid little by little over decades, a debt that takes many years to pay off.
How to rememberThe 債 in 社債 (bonds) means a promise to repay borrowed money. Promises repaid over a long period are lined up under non-current liabilities.
Exam points
Mix-upUnlike shares (株式), bonds (社債) are borrowed money that must be repaid, so they belong to liabilities (負債), not net assets (純資産).
Current liabilities vs. Non-current liabilities
Aspect
Current liabilities
Non-current liabilities
Key differenceClassification guide
Arises from core business, or due within one year
Arises outside core business, due beyond one year
Examples
Accounts payable, short-term borrowings, other payables
Long-term borrowings, bonds
Key points
Assets (other than deferred assets) and liabilities are split into current and non-current by whether they fall within one year of the balance sheet date (the one-year rule, 1年基準) and whether they are in the flow of core business transactions.
Buildings and machinery have their cost spread over their useful life through depreciation (減価償却), but land is not depreciated.
Deferred assets (繰延資産) are paid expenses carried forward as assets, with organization costs and start-up costs as typical examples.