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, assets that are expected to last only for a year or less is considered as current assets.
Current assets comprise of cash, inventory, ongoing projects, pre-paid liabilities or other liquid assets.
Key Elements of Current Asset:
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. But 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 future.
- Under the balance sheet, these assets are displayed in terms of liquidity.
For a company, the current asset in the balance sheet can be calculated as.
Current assets=Cash+Cash Equivalents+Inventory+Accounts Receivable+Market Securities+Prepaid Expenses+OtherLiquid 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.
The above mentioned is the concept, that is elucidated in detail about ‘what are current assets?’ for the Commerce students. To know more, stay tuned to BYJU’S.