What is Current assets
Current Assets
What is Current Assets?
Current assets are an essential part of a company's balance sheet. It can be cash, an equivalent of cash, or something a company can convert within 1-year. The operating cycle of a company may be over one year. In that case, they can classify an asset as a current asset (also called a current account) until they can convert it into cash within their operating cycle.
This type of asset allows a company to use the money daily. With the help of current assets, businesses meet their current expenses. These company assets are expected to be sold quickly, consumed, or exhausted through standard business operations within a year (usually).
Current Assets: What is the Formula?
Suppose you want to put the current accounts of a company on the balance sheet. In that case, you must know about the associated calculation:
Current Assets = C + I + AR + MS + PE + LE
The full form of the short forms in the formula:
C = Cash/Cash Equivalents
I = Inventory
AR = Accounts Receivable
PE = Prepaid Expenses
LE = Other Liquid Assets
Types of Current Assets
Some of the most common types of current assets of a company are:
Current Assets: Key Components
Accounts Receivable
Accounts receivable is the money a company has to pay a vendor for any good or service that is delivered but not yet paid for. They can be considered current assets if they are paid within 1-year. Suppose a business makes sales by offering longer terms of credit (more than 1-year) to the customers. In that case, a portion of its accounts receivables may not qualify for being included in the current assets.
It can also happen that some accounts may never get paid in full. This then gets reflected in an allowance for doubtful accounts, which is then subtracted from accounts receivable. You can consider an account a bad debt expense if it is never collected. These entries are not considered current assets.
Inventory
The components, raw materials, and finished products can be considered current assets. However, before including them in a company's balance sheet, you should be very careful. Accounting methods of different types can be used to inflate inventory. Compared to other assets, it may not be as liquid. This solely depends on the product and also the industry sector.
Prepaid Expenses
You can consider this type of expense as current assets as it stands for advance payments to be received in future by a company for goods and services. These are non-convertible into cash. as the payments are already done. Such components can free up the capital for other uses. Prepaid expenses can be any payment made to insurance companies or contractors.
Uses of Current Assets
Creditors and investors are always interested to know about the current assets. This is because they can quickly assess the value and risk involved in its operations. Many investors use a variety of liquidity ratios. A class of financial metrics is represented through that and is used to determine the ability of debtors to pay off current debt obligations without further raising external capital.
Can you consider fixed assets as current assets?
No, current assets are not the same as fixed assets. Current assets definition shows that these assets are liquid and can be easily converted to cash within a year or a company's operating cycle. As the fixed assets are long-term in nature, their use-value is over one year of a company's operating cycle. Some long-term assets, such as land, copyrights, equipment, facilities, and illiquid investments, don't come under current assets.
Can you consider a company's equipment, plants, and properties as current assets?
No, they are not current assets because the useful life or economic benefits of properties, plants, and equipment are more than a year.
Can inventories be regarded as current assets?
For accounting, you can consider inventories as current assets.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
Know More: Inventory Management Meaning, Warranty Definition, Royalty Definition, Copyright Definition, Porter Definition, Acquisition Definition, Kaizen Definition, Vendor Definition, Unicorn Definition, Tariff Definition
What is Current Assets?
Current assets are an essential part of a company's balance sheet. It can be cash, an equivalent of cash, or something a company can convert within 1-year. The operating cycle of a company may be over one year. In that case, they can classify an asset as a current asset (also called a current account) until they can convert it into cash within their operating cycle.
This type of asset allows a company to use the money daily. With the help of current assets, businesses meet their current expenses. These company assets are expected to be sold quickly, consumed, or exhausted through standard business operations within a year (usually).
Current Assets: What is the Formula?
Suppose you want to put the current accounts of a company on the balance sheet. In that case, you must know about the associated calculation:
Current Assets = C + I + AR + MS + PE + LE
The full form of the short forms in the formula:
C = Cash/Cash Equivalents
I = Inventory
AR = Accounts Receivable
PE = Prepaid Expenses
LE = Other Liquid Assets
Types of Current Assets
Some of the most common types of current assets of a company are:
- Cash
- Equivalent of cash
- Pre-paid liabilities
- Marketable securities (short-term treasury bills/bonds that are interest-bearing)
- Stock inventory
- Accounts receivable
- Other liquid assets
Current Assets: Key Components
Accounts Receivable
Accounts receivable is the money a company has to pay a vendor for any good or service that is delivered but not yet paid for. They can be considered current assets if they are paid within 1-year. Suppose a business makes sales by offering longer terms of credit (more than 1-year) to the customers. In that case, a portion of its accounts receivables may not qualify for being included in the current assets.
It can also happen that some accounts may never get paid in full. This then gets reflected in an allowance for doubtful accounts, which is then subtracted from accounts receivable. You can consider an account a bad debt expense if it is never collected. These entries are not considered current assets.
Inventory
The components, raw materials, and finished products can be considered current assets. However, before including them in a company's balance sheet, you should be very careful. Accounting methods of different types can be used to inflate inventory. Compared to other assets, it may not be as liquid. This solely depends on the product and also the industry sector.
Prepaid Expenses
You can consider this type of expense as current assets as it stands for advance payments to be received in future by a company for goods and services. These are non-convertible into cash. as the payments are already done. Such components can free up the capital for other uses. Prepaid expenses can be any payment made to insurance companies or contractors.
Uses of Current Assets
- It gives an insight into the liquid position as well as the cash position of a company.
- These assets help in making bill payments regularly.
- Investors and creditors can check out the current assets' position to analyze and understand the benefits/risks involved in the operation.
Creditors and investors are always interested to know about the current assets. This is because they can quickly assess the value and risk involved in its operations. Many investors use a variety of liquidity ratios. A class of financial metrics is represented through that and is used to determine the ability of debtors to pay off current debt obligations without further raising external capital.
Can you consider fixed assets as current assets?
No, current assets are not the same as fixed assets. Current assets definition shows that these assets are liquid and can be easily converted to cash within a year or a company's operating cycle. As the fixed assets are long-term in nature, their use-value is over one year of a company's operating cycle. Some long-term assets, such as land, copyrights, equipment, facilities, and illiquid investments, don't come under current assets.
Can you consider a company's equipment, plants, and properties as current assets?
No, they are not current assets because the useful life or economic benefits of properties, plants, and equipment are more than a year.
Can inventories be regarded as current assets?
For accounting, you can consider inventories as current assets.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
Know More: Inventory Management Meaning, Warranty Definition, Royalty Definition, Copyright Definition, Porter Definition, Acquisition Definition, Kaizen Definition, Vendor Definition, Unicorn Definition, Tariff Definition