Current assets are those asset of the business that can be liquidated easily. In simpler terms, the assets that can be easily converted into cash usually within one year are current assets. Accountants normally confuse current asset with fixed assets. The difference between these two assets should be discussed and made clear for effectively managing the business’s finances.
Let’s discuss this with an example, the assets such as buildings cannot be easily converted into cash because not everyone is in frequent need of buying a building. Businesses cannot quickly convert the building into cash so it is not a current asset rather it is a fixed asset. There is a simple formula for calculating current asset. Let’s discuss it.
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Current assets formula:
The formula for current asset involves the addition of cash, accounts receivable, inventory, marketable securities, prepaid expenses, and all other liquid asset.
List of current assets:
Here is the current asset list:
1- Cash and its equivalent:
Cash is the most liquid current asset. As discussed earlier, the assets that can be quickly and easily converted into cash are current asset. There is no need for cash to be converted. Similarly, cash equivalents such as money market mutual funds are also short-term asset.
So, cash and cash equivalents are current asset.
2-Marketable Securities:
Marketable securities are current asset. These securities include the stocks of the company traded on public exchanges. Examples of marketable securities include treasury bills and bonds etc. people are available to buy these securities, making them a short-term asset.
3-Account Receivables:
Accounts receivable is the cash that the business has not collected yet over its rendered services. Businesses sometimes give their services to the customers on account on which it agrees to collect the payment later on. As the businesses get the cash so accounts receivable is a current asset.
4-Inventory/Stock:
Inventory is that asset of the business which is in stock. It can include raw materials needed to make finished goods, work in process, or the finished goods themselves. Such asset are then made available for the business to sell. They can be converted into cash within a period of one year. So, inventory is a current asset.
5-Prepaid Expenses:
As the name depicts, prepaid expenses are the expenses that are paid prior to the service being availed. These expenses are paid in advance. For instance, prepaid insurance is a current asset as it provides coverage for a full month but you get to pay it on the last day of the previous month.
6-Other Current Assets:
Other current asset are all the assets other than the ones mentioned above that can be converted into cash within one year. Companies discuss current asset details in notes to the financial statements.
Conclusion:
Current assets are all short-term assets and are convertible into cash within one year. The current asset list must have made this clear for you to understand what current asset are. On the other hand, assets with a life greater than one year are classified as non-current asset.
