Current Assets Definition
Current assets or current assets of the company can be an important component of the overall balance sheet. Current assets can include cash, inventory, and any accounts receivable the business may have.
In addition, current assets can be separated from long-term assets when evaluating a company’s short-term liquidity. Furthermore, current business assets can also be part of what determines the overall financial health of the business.
In this article, you’ll learn what current assets are, how to calculate them, get to know what they are, and give an example of what current assets represent in a business.
Contents
1 What are Current Assets?
2 Key Components of Current Assets in Business
2.1 Cash and cash equivalents
2.2 Temporary or short term investment
2.3 Current Accounts
2.4 Inventory
2.5 Resources and equipment
2.6 Fees are paid in advance
3 Ways to Calculate Current Asset Value
3.1 1. Add up all cash and cash equivalents
3.2 2. Combine all short-term investments
3.3 3. Find the total current accounts receivable
3.4 4. Add up all supplies, supplies, and prepaid expenses
4 Financial Ratios Using Current Assets
5 Examples of Current Assets in a Company
What are Current Assets?
Current assets represent business cash and other assets that can be converted into cash or cash within one year from the date they appear on the balance sheet.
If a business has an operating cycle that is longer than a one-year period, any assets that can be converted to cash in that operating cycle can be considered as current assets.
In addition, current assets are usually presented as the first item on a business balance sheet, arranged in order of their liquidity. The company’s current assets can also be an important part of its working capital and current ratio.
Current assets differ from long-term assets, which describe the company’s assets that cannot be converted into cash within one balance sheet year. Long-term assets can include property and buildings, equipment or copyright.
Key Components of Current Assets in Business
Generally, the current assets of a business can include cash or cash equivalents, short-term investments, current accounts receivable, or shareholder equity. Several other key components make up a company’s current assets:
Cash and cash equivalents
A company’s cash and cash equivalents represent the amount of currency, as well as the currency held in checking accounts, and petty cash.
The temporary or short term investment
Temporary and Short-Term Investments are current assets that can be liquidated within one year from the date of the company’s balance sheet. For example, a company may have a temporary investment in liquid securities.
Current Accounts
Current accounts receivable are assets in the form of money that are owed to the company for goods or services delivered previously. These accounts are cash equivalents that have not been paid by customers.
Subscription services, recurring recalls for product shipments and biennial fees are some of the types of receivables that a business can rely on as part of its current assets.
Inventory
Current assets in the form of tangible inventories can include raw materials, spare parts for products and finished products, and services. While inventory can be an important asset today, the liquidity of a company’s inventory may depend on the product and industry.
For example, a business that sells heavy equipment may have little guarantee that each machine can be sold over a period of one year, whereas a company that manufactures Muslim clothing may have a great opportunity to sell high-quality Muslim clothing during the month of Ramadan.
Resources and equipment
Current assets in the form of resources and equipment can include production tools, materials for product development, and any tangible equipment required for business operations.
Prepaid expenses
A prepaid fee is a prepayment a company makes for a product or service that is scheduled to be received in the future.
However, these current assets differ from other components in that prepaid expenses cannot be converted into cash, even though they are expenses that have already been borne so the business avoids heavier expenses later on. An example of a prepaid expense might be a payment for an employee insurance plan.
How to Calculate Current Asset Value
Calculating your current assets can be relatively simple and accomplished in several important steps.
1. Add up all cash and cash equivalents
The first step in calculating your total current assets is to add up all petty cash and currency held in your checking account.
For example, if a company has 35,000,000 in petty cash and 112,500,000 is held in a checking account, the total amount in cash and cash equivalents equals 147,500,000.
2. Combine all short-term investments
The next step is to find a total of all temporary and short-term investments. For example, if your company has 50,000,000 in shares, this will represent the total amount in short-term investments.
3. Find the total current accounts receivable
After combining cash and short-term investments, you can calculate the total current receivables. Add up the amount owed to the business by the customer.
For example, if a magazine brand calculates 670,000 in subscription fees payable to them, as well as a biennial membership fee of 932,000, the magazine company’s total receivables, will be 1,602,000.
4. Add up all supplies, supplies, and prepaid expenses
The final step before calculating total current assets is to add up all tangible assets such as company inventory, equipment, and prepaid expenses.
For example, an online content service provider may not have a tangible inventory, so the company can calculate any resources such as copyrights or website domains, as well as prepaid costs such as hosting and domain subscriptions.
Financial Ratios Using Current Assets
Business operations often contain different aspects, different accounting methods and payment cycles, and because of this, it is sometimes difficult to precisely categorize which assets can be considered current over a given period.
The following financial ratios can be used to measure the liquidity of a business, and each ratio can use a different number of elements of current assets to measure the current liabilities of a business.
- Current ratio: measures the company’s ability to pay off short-term obligations by considering current assets relative to the company’s current liabilities. To find the current ratio, divide current assets by current liabilities.
- Quick ratio: measures a company’s likelihood of meeting its short-term obligations with cash, cash equivalents, receivables and any securities. To calculate a quick ratio, add up all current and long-term assets and divide by total liabilities.
- Cash ratio: used to measure a company’s ability to pay back all of its short-term obligations, generally in an immediate period of time. To find the cash ratio, add up only cash and cash equivalents and then divide by current liabilities.
These financial ratios can be used to evaluate the ability of a business to meet its obligations, debts, and its ability to cover current liabilities and any expenses without having to sell its fixed assets.
Examples of Current Assets in a Company
When evaluating current assets, it is helpful to consider examples to illustrate the details of a company’s current assets on a balance sheet.
Natural Green, a manufacturer of recycled and composite home products, has received a balance sheet for the year-round cycle. The top of the balance sheet, current assets, details the following information for the company:
Cash and cash equivalents
- Petty cash = $157,500
- Current account funds = $678,000
- Treasury Bill = $250,000
- Short term investment
Total short term investment = $125,000
Receivables
- Membership fee (per month) = $340,000
- Annual subscription = $ 789,000
- Product discount club fee = $325,000
Inventory and tangible goods
- Product inventory = $ 174,000
- Tangible goods (operating materials) = $62,000
Prepaid expenses
- Prepaid insurance deduction = $125,500
- Prepaid tax = IDR 75,250,000
When calculating the total current assets for Natural Green, the financial officer basically adds up all the amounts listed in this section of the balance sheet.
The resulting amount is a rough estimate of all the current assets of the company. In this example, the total amount is approximately $3,101,250 in current assets.