What is the main advantage of distinguishing between current and non-current items in the balance sheet?

Provide a better understanding of short-term and long-term financial position

Distinguishing between current and non-current items in the balance sheet offers the main advantage of providing stakeholders with a better understanding of the short-term and long-term financial position of the entity. This classification allows stakeholders to discern the liquidity and solvency of the company by segregating assets and liabilities based on their maturity and timing of realization or settlement. By clearly differentiating between current assets and liabilities (short-term) and non-current assets and liabilities (long-term), the balance sheet helps stakeholders assess the company's ability to meet its short-term obligations and working capital needs. It also enables them to analyze the company's long-term investments, long-term debt, and other financial commitments that extend beyond the immediate twelve-month period. The distinction between current and non-current items aids investors, creditors, and other stakeholders in making informed decisions. They can gauge whether the company has enough short-term liquidity to cover its current liabilities, as well as evaluate the company's long-term financial stability and sustainability. Additionally, this classification enhances transparency and comparability among different entities, making it easier for stakeholders to analyze and compare financial information across companies, industries, and time periods.