Current Assets Definition:
A current asset is an asset that a company holds and can be easily sold or consumed and further lead to the conversion of liquid cash. For a company, a current asset is an important factor as it gives them a space to use the money on a day-to-day basis and clear the current business expenses. In other words, the meaning of current assets can be explained as an asset that is expected to last only for a year or less is considered as current assets.
Types of Current Assets:
- Cash and cash equivalent
- Ongoing projects
- Pre-paid expenses
- Account receivable
- Marketable securities
The above mentioned are the obvious list of current assets that are taken into consideration to check the operation cycle of a company within one year.
Also Read: What is the difference between Fixed Assets and Current Assets?
Key Elements of Current Assets:
Apart from cash, liquid equivalent, cash investment are obvious elements of current assets. Other various elements added on the list of current assets are as follows:
- When a company is expected to receive a due payment from a client for goods and services received within a year or less than a year is considered as a current asset.
- If a company made a sale and the credit duration is more than a year, in this case, the portion of an amount received as an advanced does not come under current asset.
- Inventory items such as raw materials, components, a finished product are included under current asset. However, these items need consideration as it might sometime block the flowing capital.
- Prepaid expenses come under this category as the payment, or advanced payment has already been made for the good and services in the future.
- Under the balance sheet, these assets are displayed in terms of liquidity.
Current Assets Formula
For a company, the current asset in the balance sheet can be calculated as follows.
Current assets=Cash+Cash Equivalents+Inventory+Accounts Receivable+Market Securities+Prepaid Expenses+Other Liquid Assets
Uses of Current Assets:
- Current Assets can be used as clear regular payments and bills.
- It gives an insight into the company’s cash and liquid position
- Investors and Creditors analyse the company’s current assets closely to understand the risk or benefits involved in the operation.
Examples of Current Assets
- Cash and equivalents.
- Short-term investments (marketable securities).
- Accounts receivable.
- Prepaid expenses.
- Any other liquid assets
Additional Reading: Get the List of Non Current Assets
What is Total Current Assets?
Total current asset is the total calculation of all cash, prepaid expenses, receivables, and inventory on the company’s balance sheet.
Total Current Assets Formula
- Current Ratio = Current Assets ÷ Current Liabilities
- Quick Ratio = (Current Assets – Inventory + Prepaid Expenses) ÷ Current Liabilities
- Net Working Capital = Current Assets – Current Liabilities
- Average Current Assets = (Aggregate Assets for Current Year + Aggregate Assets for Preceding Year) ÷ 2
The concept of ‘Current Assets’ is explained in detail in this article, which is very important for the Commerce students. To learn more such interesting concepts, stay tuned to BYJU’S.