AccountancyCBSE Class 12 · Financial Statements of a Company

Current and Non-current Classification under Schedule III: Class 12 Tests and Cases

Updated 15 October 2026 · Fact-checked

Under Schedule III, an asset is current if it will be realised or consumed in the normal operating cycle, is held for trading, is due within 12 months of the reporting date, or is cash or a cash equivalent. Liabilities follow matching tests. Everything else is non-current.

Understand Current and Non-current Classification

Why classify? Readers want to know what the company can turn into cash soon (current assets) and what it must pay soon (current liabilities). Liquidity ratios depend on this split, so Schedule III gives exact tests.

Operating cycle. The time between acquiring assets for processing and realising them in cash or cash equivalents: buying materials → producing → selling → collecting from customers. If the operating cycle cannot be identified, it is assumed to be 12 months.

An asset is current if any one test is met:
1. it is expected to be realised, or is held for sale or consumption, in the company's normal operating cycle;
2. it is held primarily for trading;
3. it is expected to be realised within 12 months after the reporting date; or
4. it is cash or a cash equivalent, unless restricted from use for at least 12 months.
All other assets are non-current.

A liability is current if any one test is met:
1. it is expected to be settled in the normal operating cycle;
2. it is held primarily for trading;
3. it is due to be settled within 12 months after the reporting date; or
4. the company does not have an unconditional right to defer settlement for at least 12 months after the reporting date.
All other liabilities are non-current.

Fixed rules that save marks.

Inventories and trade receivables that arise in the operating cycle are current even if realised after more than 12 months (when the cycle is longer).
Fixed assets (PPE and intangibles) are non-current, whatever their remaining life.
Deferred tax assets and liabilities are always non-current.
Loans repayable on demand (bank overdraft, cash credit) are short-term borrowings.
The part of a long-term loan due within 12 months is a current liability (current maturities of long-term debt), the rest non-current.
Investments held for trading are current investments; those held long term are non-current investments.

Current and Non-current Classification: key facts

Operating cycle: Raw material holding + production time + finished goods holding + debtors' collection period; Assumed 12 months if not identifiable.
Current asset test: Operating cycle OR held for trading OR within 12 months OR cash/cash equivalent; Any one test is enough.
Current liability test: Operating cycle OR held for trading OR due within 12 months OR no unconditional right to defer 12 months
Term loan split: Instalments due within 12 months = current; rest = non-current

How to answer Current and Non-current Classification questions

Run the four tests in order and stop at the first one that applies; then pick the Schedule III sub-head.

1Find the operating cycle (given or computed); if unknown, use 12 months.
2Ask: is the item part of the operating cycle (inventory, trade receivables, trade payables)? If yes, current.
3Is it held for trading? If yes, current.
4Is it due or realisable within 12 months of the reporting date? If yes, current.
5For liabilities, check whether the company can unconditionally defer settlement beyond 12 months.
6Otherwise non-current; then name the sub-head.

Current and Non-current Classification in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Operating cycle longer than 12 months

Suppose Oakleaf Furniture Ltd (a fictional company) makes custom wooden furniture: wood is seasoned for 8 months, crafting takes 4 months, finished pieces wait 2 months for delivery, and customers pay 3 months after delivery. A customer's dues of ₹2,00,000 will be collected 15 months after the reporting date.

Is the ₹2,00,000 a current or non-current asset? Explain.

Try it first, then show the solutionSolution

Operating cycle = 8 + 4 + 2 + 3 = 17 months.
The dues arise from normal sales within the operating cycle.
Test 1 (operating cycle) is met, even though 15 months > 12 months.

Answer: Current asset, shown under Trade receivables. Its collection falls within the company's 17-month operating cycle, and the operating cycle test applies before the 12-month test.

Memory hook: If it is part of the cycle, it is current, however long the cycle.

Tricks to remember Current and Non-current Classification

Short memory aids. Say each one aloud once, then use it on a question the same day.

O-T-T-C
Operating cycle, Trading, Twelve months, Cash: any one makes an asset current.
Use it when: Asset tests.
Always/never list
Inventories always current; fixed assets and deferred tax always non-current.
Use it when: Quick MCQs.
Can't push it, it's current
No unconditional right to defer beyond 12 months makes a liability current.
Use it when: Liability classification.

Current and Non-current Classification: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Operating cycle not identifiable · 1 mark · MCQBoard level

When a company's normal operating cycle cannot be identified, it is assumed to be:
(a) 6 months
(b) 12 months
(c) 18 months
(d) the life of the longest asset

Try it first, then show the solutionSolution

Schedule III assumes a 12-month operating cycle when it is not identifiable.

Answer: (b) 12 months

Example 2: Classify six items · 3 marks · Short answerBoard level

A company has an operating cycle of 18 months. Classify as current or non-current, with the sub-head: (i) trade receivables collectable in 15 months; (ii) a loan given to a supplier, repayable in 15 months; (iii) shares bought for trading, to be sold in 3 months; (iv) machinery with 1 year of life left; (v) bank overdraft; (vi) an instalment of a term loan due in 8 months. (3 marks)

Try it first, then show the solutionSolution

(i) Current: within the operating cycle → Trade receivables. (ii) Non-current: not in the cycle and beyond 12 months → Long-term loans and advances.
(iii) Current: held for trading → Current investments. (iv) Non-current: fixed asset → PPE.
(v) Current → Short-term borrowings. (vi) Current → Other current liabilities (current maturities).

Answer: Current: (i), (iii), (v), (vi). Non-current: (ii), (iv).

Example 3: Computing the operating cycle · 3 marks · Short answerHarder board level

A manufacturer holds raw materials for 45 days; production takes 30 days; finished goods are held for 25 days; customers pay in 60 days. (i) Calculate the operating cycle. (ii) Are trade receivables due in 150 days current? (3 marks)

Try it first, then show the solutionSolution

(i) Operating cycle = 45 + 30 + 25 + 60 = 160 days.
(ii) Yes: 150 days falls within 12 months (and they arise in the operating cycle).

Answer: Operating cycle = 160 days; the receivables are current.

Example 4: Payables in a long operating cycle · 3 marks · Short answerHarder board level

A shipbuilder's operating cycle is 20 months. Trade payables of ₹6,00,000 to steel suppliers fall due 16 months after the reporting date. Classify them and justify. (3 marks)

Try it first, then show the solutionSolution

The payables arise from purchases for the normal operating cycle.
They are expected to be settled within the 20-month operating cycle.
So they are current: Current Liabilities → Trade payables, even though due after 12 months.

Answer: Current liability (Trade payables), by the operating cycle test.

Example 5: Splitting liabilities · 4 marks · Short answerHOTS / competency

On 31st March 2026, a company has: a bank term loan of ₹10,00,000 of which ₹1,00,000 is repayable by 31st March 2027; a security deposit of ₹50,000 received from a dealer, refundable after 3 years; deferred tax liability of ₹30,000; interest accrued but not due on the loan ₹20,000. Show the classification with amounts. (4 marks)

Try it first, then show the solutionSolution

Long-term borrowings: 10,00,000 − 1,00,000 = ₹9,00,000.
Other long-term liabilities: security deposit ₹50,000.
Deferred tax liabilities (net): ₹30,000 (always non-current).
Other current liabilities: current maturities 1,00,000 + interest accrued 20,000 = ₹1,20,000.

Answer: Non-current: Long-term borrowings 9,00,000; Deferred tax liabilities 30,000; Other long-term liabilities 50,000. Current: Other current liabilities 1,20,000.

Example 6: Slow-moving inventory · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): Inventory expected to be sold 14 months after the reporting date is a non-current asset.
Reason (R): Inventories are held for sale or consumption in the normal operating cycle and are classified as current.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Inventories meet the operating cycle test, so they are current; A is false.

Answer: (d) A is false, but R is true.

Where students lose marks in Current and Non-current Classification

The slips examiners see most often, and what to write instead.

Mistake: Using only the 12-month test
Forgetting the operating cycle comes first.
Wrong working
Receivables due in 15 months → non-current.
Right working
Within an 18-month operating cycle → current.
Do this: Check the operating cycle before the 12-month test.
Usually costs: 1 mark.
Mistake: Treating a fixed asset with short remaining life as current
Applying the 12-month test to PPE.
Wrong working
Machinery with 1 year life → current assets.
Right working
Fixed assets are always non-current.
Do this: PPE is held for use, not sale.
Usually costs: 1 mark.
Mistake: Leaving current maturities in long-term borrowings
Not splitting the loan.
Wrong working
Long-term borrowings 10,00,000.
Right working
9,00,000 long-term; 1,00,000 other current liabilities.
Do this: Split every term loan by due date.
Usually costs: 1 mark.
Mistake: Calling deferred tax current
It may reverse soon.
Wrong working
Deferred tax liability under short-term provisions.
Right working
Non-current: Deferred tax liabilities (net).
Do this: Deferred tax is always non-current.
Usually costs: 1 mark.

Exam tips

Name the test you used: 'current, as it is within the operating cycle'.
Give the sub-head along with current or non-current; both carry marks.
When the question states an operating cycle, it wants you to use it.
Classification items appear as 1-mark MCQs and 3-mark short answers.

Practice questions on Current and Non-current Classification

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Which of the following is always classified as a current asset under Schedule III?
(a) Machinery
(b) Inventories
(c) Deferred tax asset
(d) Goodwill
Hint
Part of the operating cycle.
Answer
(b) Inventories
Q2 · 1 mark · MCQBoard level
Cash and cash equivalents are classified as:
(a) non-current assets
(b) current assets, unless restricted from use for at least 12 months
(c) current investments
(d) other non-current assets
Hint
Test 4.
Answer
(b) current assets, unless restricted from use for at least 12 months
Q3 · 3 marks · Short answerBoard level
Classify as current or non-current: (i) Patents; (ii) Bills payable; (iii) Cash credit from bank; (iv) Prepaid insurance; (v) Long-term investment in a subsidiary; (vi) Stock of finished goods. (3 marks)
Hint
Fixed rules help.
Answer
Non-current: (i) Patents (intangible assets), (v) investment in subsidiary (non-current investments). Current: (ii) Bills payable (trade payables), (iii) Cash credit (short-term borrowings), (iv) Prepaid insurance (other current assets), (vi) Finished goods (inventories).
Q4 · 1 mark · Very short answerHarder board level
Raw materials are held for 2 months, production takes 1 month, finished goods are held 1.5 months and customers take 2.5 months to pay. Calculate the operating cycle. (1 mark)
Hint
Add the stages.
Answer
2 + 1 + 1.5 + 2.5 = 7 months.
Q5 · 3 marks · Short answerHarder board level
Classify these liabilities with sub-heads: (i) loan repayable on demand; (ii) 9% debentures redeemable after 4 years; (iii) interest accrued but not due on debentures; (iv) provision for employee gratuity payable after 5 years. (3 marks)
Hint
Two current, two non-current.
Answer
(i) Current → Short-term borrowings; (ii) Non-current → Long-term borrowings; (iii) Current → Other current liabilities; (iv) Non-current → Long-term provisions.
Q6 · 3 marks · Short answerHarder board level
A loan of ₹3,00,000 is due 6 months after the reporting date, but the lender has given the company an unconditional right, under the existing agreement, to roll it over for 2 more years. Classify it. (3 marks)
Hint
Liability test 4.
Answer
Non-current (Long-term borrowings). Although due in 6 months, the company has an unconditional right to defer settlement for at least 12 months, so it does not meet the current-liability tests.
Q7 · 3 marks · Short answerHarder board level
A company's operating cycle is 15 months. From these items, calculate total current assets: inventories ₹80,000; trade receivables ₹60,000 (collectable in 14 months); loan to a supplier ₹20,000 (repayable in 2 years); prepaid expenses ₹5,000; machinery ₹2,00,000. (3 marks)
Hint
Leave out the supplier loan and machinery.
Answer
Current assets = 80,000 + 60,000 + 5,000 = ₹1,45,000. The supplier loan (not in the cycle, beyond 12 months) and machinery (fixed asset) are non-current.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): An instalment of a long-term loan payable within 12 months is a current liability.
Reason (R): It is due to be settled within 12 months after the reporting date.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Liability test 3.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 3 marks · Short answerHOTS / competency
Suppose a whisky distillery ages its spirit for 3 years before sale, so its operating cycle is about 40 months. How should it classify its maturing stock, and why might an analyst adjust for this when judging liquidity? (3 marks)
Hint
Operating cycle test vs speed of cash.
Answer
Maturing stock is current (Inventories), because it is held for sale in the normal operating cycle. But it will not become cash for years, so an analyst comparing liquidity with other industries may rely on the quick ratio, which excludes inventories.
Q10 · 3 marks · Short answerHOTS / competency
A company reports current assets of ₹3,00,000 and current liabilities of ₹1,50,000, but a ₹50,000 instalment of a term loan due in 10 months was left in long-term borrowings. Calculate the current ratio before and after correcting the error. (3 marks)
Hint
Move the instalment to current liabilities.
Answer
Before: 3,00,000 ÷ 1,50,000 = 2 : 1. After: 3,00,000 ÷ 2,00,000 = 1.5 : 1. Wrong classification overstated liquidity.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Define operating cycle.Show answer
The time between acquiring assets for processing and realising them in cash or cash equivalents.
2.Name the four tests for a current asset.Show answer
Operating cycle, held for trading, within 12 months, cash or cash equivalent.
3.Is deferred tax liability ever current?Show answer
No; always non-current.
4.Where is a bank overdraft shown?Show answer
Current liabilities → Short-term borrowings.
5.Trade receivables due in 14 months with an 18-month cycle: current or not?Show answer
Current.

Current and Non-current Classification: frequently asked questions

What is the difference between current and non-current assets in Class 12?

Current assets are realised or used within the operating cycle or 12 months, held for trading, or are cash; all other assets are non-current.

What if the operating cycle is longer than 12 months?

Items that arise in the operating cycle (inventories, trade receivables, trade payables) are still current.

How is a long-term loan with instalments classified?

Instalments due within 12 months are other current liabilities (current maturities); the rest are long-term borrowings.

Why does classification matter?

It drives liquidity ratios such as the current and quick ratios, so wrong classification misleads users.