Everything you need to know about current assets
Definition: What Are Current Assets?
Current assets, or current accounts, is a balance sheet category of short-term economic resources controlled by an entity, comprised of cash and liquid assets to be converted into cash, sold, consumed, used or exhausted within the longer of 1 year or one standard business operating cycle.
Current assets is a line on a company’s balance sheet that includes cash and other resources with useful life of less than 1 year.
Where:
| Current Assets: Definition - Explanation | |
|---|---|
| Current | = short-term liquid assets that can be used or liquidated at a fair price in the period of one year or one operating cycle |
| • 12 months from the date of acquisition or the balance sheet date | |
| • Fiscal or financial year | |
| • One normal operating cycle of a business (even if longer than 12 months) | |
| Assets | = resources owned or controlled by an entity for future economic benefit |
| • Cash and cash equivalents | |
| • Short-term investments | |
| • Accounts receivable | |
| • Inventory and supplies | |
| • Pre-paid expenses | |
| Useful life | = period of time for use in business |
| • Sold or otherwise realized in cash | |
| • Consumed, used or otherwise exhausted | |
Examples: What Are the Types of Current Assets?
The most common examples of current assets on a company’s balance sheet include, in the order of their liquidity: cash, cash equivalents, short-term investments, accounts receivable, stock inventory, prepaid expenses, and other liquid assets.
In financial statements, companies may list many different line items under the main category of current assets on their balance sheets.
These sub-categories generally fall into 5 broad groups, sorted from most to least liquid:
- Cash and cash equivalents (e.g., cash on hand, petty cash, cash in bank)
- Short-term investments (e.g., liquid marketable equity and debt securities)
- Accounts receivable (i.e., trade and other non-trade receivables)
- Inventory stock and supplies (i.e., raw materials, components, work-in-progress and finished goods)
- Prepaid expenses (i.e., expenses that were paid for upfront in one accounting period but will be consumed in the future)
- Other liquid assets (i.e., assets that will mature or can be conveniently liquidated within 12 months)
When current assets are presented on a balance sheet, they tend to be arranged in their order of liquidity, meaning that the more liquid assets are put on top of the list.
Cash, Cash Equivalents & Short-term Investments
Businesses need cash to run their day-to-day operations.
However, cash does not only refer to the actual currency, coins and paper bills sitting in a cash register, petty cash box, or a bank vault.
Cash equivalents are highly liquid investment holdings that can be converted into known cash amounts fast and with little or no risk.
1. Petty Cash
Petty cash, or petty cash fund, is a small amount of money, typically between $30 and $500, that a business keeps on hand on its premises to pay for ad-hoc business expenses that are too small to warrant writing a check, such as office supplies, meeting refreshments, postage and delivery.
2. Cash on Hand
Cash on hand are undeposited receipts of cash, checks and money orders collected from customers as a result of direct cash sales, or when a credit purchase is settled with a cash transaction, that are due to be transferred into petty cash or deposited into a bank account.
3. Cash in Bank
Cash-in-bank, or cash-at-bank, current assets refer to the various types of accounts that a business maintains with a financial institution, such as:
- Current or checking accounts
- Foreign currency accounts
- Savings accounts
- Money market accounts
- Easy-access deposit accounts
- Fixed-term deposit accounts
When money is deposited with a bank for a term that exceeds 12 months only the current portion (<1 year) is included in current assets. The remaining amount (>1 year) is classified as a long-term investment in the non-current assets section of a balance sheet.
4. Cash Equivalents & Short-term Investments
When a business generates excess cash that is not needed for operations or distribution to shareholders, it can either keep the money in a bank account or invest it.
Any short-term investment that has less than 12 months to maturity or is expected to be sold or converted into cash within one year should be classified as a current asset.
While these marketable securities may be a little less liquid than cash, they offer higher rates of return and are heavily traded on public exchanges with buyers being readily available.
Highly liquid short-term investments maturing in 3 months or less are known as “cash equivalents” as there is a very low risk of not collecting the cash in full at maturity.
Examples of such short-term liquid marketable investment vehicles include:
- Mutual funds and money market funds
- Commercial paper
- Certificates of deposit
- Mortgage and asset backed securities
- Domestic and foreign government securities
- Corporate notes and bonds
- Common and preferred stock
- Other equity and debt securities
Accounts Receivable
Accounts receivable include non-trade and trade receivables, with the latter usually making up a significantly larger portion of the total balance displayed under current assets on a balance sheet.
1.Trade Receivables
Accounts receivable, AR or trade receivables, is the unpaid balance due to be collected from customers when a company sells goods or services on credit.
Accounts receivable are payments due from customers for their credit purchases, which are classified as current assets if they are expected to be collected within one year.
For companies offering longer credit terms to customers, the portion of accounts receivable that is due in more than 12 months will not qualify as a current asset.
Accounts receivable also exclude any allowances/provisions for doubtful and bad debts to ensure that current assets reflect the value that the business reasonably expects to receive as some customer accounts may never be recovered (e.g., a customer becomes insolvent), which is a fact of business.
2. Non-trade Receivables
Non-trade receivables are accounts receivable for non-trade activities due from entities or persons other than customers, such as employees, vendors or government authorities.
Examples of non-trade receivables include:
- Employees: short-term staff loans, salary advances
- Vendors: prepaid liabilities (e.g., rent, utilities, deposits), insurance claims
- Authorities: tax refunds
- Other Companies: loan to another company or even an entity within same group
Again, only the amount of non-trade receivables that a company expects to collect within one year should be classed as current assets.
Inventory Stock
Inventory, or stock, are current assets encompassing raw materials, components, work-in-progress and finished products that a business holds in stock and expects to sell.
Let’s take an example of a car:
- Raw materials – steel, plastic, glass
- Components – chassis, instrumentation, panels (e.g., dash, doors), lights, seats, pedals (break, gas), steering column, wiring, computer, carpeting
- Work-in-progress – partially assembled vehicle units as they go through the production process
- Finished product – fully assembled cars
The car manufacturer first purchases the raw materials and components from its suppliers, which it then combines with labor and other direct overheads during the car manufacturing process where the work-in-progress vehicles turn into finished cars that are ready to be sold.
Inventories are classified as current assets because stock can be sold relatively quickly.
Nevertheless, inventory is generally the least liquid type of current assets because the process of converting it into cash is usually lengthier and riskier, particularly for some products, business models and industries.
For instance, inventory can become temporarily illiquid or even permanently obsolete because of market fluctuations.
Hence, it is important to maintain optimum stock levels at all times to run business operations efficiently. This is especially true for companies that require large amounts of physical stock, such as those in manufacturing and retail.
Also, keep in mind that the value of inventory is affected by the accounting policies and stock valuation methods used by a company.
Prepaid Expenses
Prepaid expenses represent the liabilities that were paid for in advance in the current or previous accounting period but will not be consumed until future accounting periods.
Prepaid expenses are classified as current assets when a company makes up-front advance payments for goods and services that it expects to receive within 1 year.
These current assets will turn into expenses when the company actually consumes the goods or services over the course of next year.
Examples include prepaid rent and insurance expenses.
Let’s suppose a company makes an advance payment for an insurance premium that will provide coverage for the upcoming year:
- 1. At the time of payment in the current year, the company will record the full amount as a prepaid expense, which is an asset because it represents something of future benefit to the company.
- 2. Over the following year, the value of the asset will decrease corresponding to the time period remaining on the insurance policy, with the amount of the decrease also being recorded as an expense in the company’s accounts.
Other Current Assets
Current assets vary based on the type of business, industry and many additional factors.
As a result, any other business resource satisfying the definition of an asset with a useful life shorter than 1 year should be recorded as a current asset on a balance sheet, even if it does not fall under the most common categories as per above.
Details of other assets are generally provided in the notes to a company’s financial statements.
Formula: How to Calculate Current Assets?
Current assets can be found on a company’s balance sheet. Otherwise, current assets are calculated either by adding up all of a company’s liquid assets–or by deducting non-current assets from the total assets of a company, where assets are equal to liabilities plus equity.
When you have access to a company’s financial statements, there is no need to calculate current assets because the line item is clearly shown on the balance sheet.
Alternatively, current assets can be calculated in one of two ways, depending on what information you have access to:
1. Add up all of the liquid assets of a company:
Current Assets = Cash + Cash Equivalents + Short-Term Investments + Accounts Receivable + Inventory + Pre-Paid expenses + Other Liquid Assets
2. Deduct a company’s non-current assets from the total value of its assets. According to the accounting equation, assets are equal to liabilities plus equity.
Current Assets = Total Assets - Non-Current Assets
Current Assets = (Liabilities + Equity) - Non-Current Assets
Importance: How Are Current Assets Used?
Since current assets are readily convertible to cash within one year, they indicate the short-term financial health of a company by measuring its liquidity as the capacity to meet current financial obligations, such as day-to-day business expenses and debt repayments, without raising outside funds.
Essentially, current assets represent the dollar value of all the liquid assets and resources that a company can easily turn into cash in a short period of time, which it can then use to pay for business operating costs.
Current assets are used by company management as well as investors, creditors and other stakeholders to evaluate:
- Cashflows and funding of daily business operations
- Cash and liquidity position
- Business risk
- Business value
Ratios Using Current Assets
Current assets are an essential part of liquidity ratios like current ratio, quick ratio and cash ratio.
Liquidity ratios compare different components of current assets against current liabilities in order to measure a company’s ability to pay its short-term debts and expenses without having to sell other assets or raise external capital.
The proportion of current assets to current liabilities indicates the short-term liquidity of a company because having more current assets than liabilities means that a business is more likely to meet its obligations.
Current Ratio
Current ratio is an indicator of liquidity, which measures a company’s ability to meet its short-term obligations using all of its liquid assets, calculated by dividing total current assets by total current liabilities.
Current ratio = Current assets ÷ Current liabilities
Quick Ratio
Quick ratio, or acid-test ratio, is an indicator of liquidity, which measures a company’s ability to meet its short-term obligations using only its most liquid assets, calculated by dividing near-cash quick assets by total current liabilities.
Quick assets typically include cash and cash equivalents, marketable securities and accounts receivable that can be readily converted to cash within 90 days–but exclude inventory, especially in entities with long inventory cash cycles that result in illiquid stock.
Quick ratio = (Current assets - Inventory) ÷ Current liabilities
Quick ratio = (Cash and cash equivalents + Accounts receivable + Marketable securities) ÷ Current liabilities
Cash Ratio
Current ratio is an indicator of liquidity, which measures a company’s ability to meet its short-term obligations immediately using only its cash and cash equivalents, calculated by dividing total cash and cash equivalents by total current liabilities.
Cash equivalents typically include liquid marketable debt and equity securities that mature or can be easily converted to cash within 90 days.
Cash ratio = (Cash + Cash equivalents) ÷ Current liabilities
The cash ratio is the most conservative current liquidity ratio as it takes only cash and cash equivalents into consideration, whereas the current ratio is the most accommodating as it includes all types of current assets.
| Current Asset Ratios | ||
|---|---|---|
| (= Current Assets ÷ Current Liabilities) | ||
| Ratio | Formula Numerator | Liquidity Measure |
| Current ratio | Total current assets | All liquid assets |
| Quick ratio | (Current assets – Inventory) | Only the most liquid assets convertible to cash within 90 days |
| Cash ratio | (Cash + Cash equivalents) | Only cash and cash equivalents |
Working Capital
Current assets are also a key component of a company’s working capital, which is used to fund daily business operations and calculated as the difference between current assets and current liability:
(Net) Working Capital = Current Assets - Current Liabilities
Limitations of Current Assets
While current assets are an effective measure of a company’s liquidity and its ability to meet financial obligations, there are some inherent limitations:
- Illiquid Assets
Some of current assets may become illiquid when, for example:
- Overdue accounts receivable invoices may result in uncollectible bad debts.
- Obsolete inventory may need to be sold at a loss or even written off.
Hence, the contents of current assets need to be carefully examined to establish the true liquidity of a company and ensure it is not overstated.
- Working Capital
Excessive accumulation of current assets may lead to increased cost of business due to the time value of money and opportunity cost.
On the other hand, lack of current assets (e.g., inventory) may disrupt operations and result in the loss of business opportunities.
Therefore, maintaining current assets at an optimal level is vital for any company.
- Comparability
Inconsistent accounting methods, payment cycles and other company specific factors make it challenging to compare current asset portfolios of different companies. Keep this in mind when analyzing a company’s financial statements.
Accounting for Current Assets
In bookkeeping, an increase in current assets is shown on the debit side of an account, whereas decrease is recorded as a credit.
| Current Assets: Debits & Credits | |
|---|---|
| Increase | Decrease |
| Debit | Credit |
In financial statements, current assets are reported on the balance sheet as of a specific date, being presented first on top of the assets section and arranged in order of liquidity.
When a current asset is used or sold, the transaction is captured in the income statement for the period (e.g., COGS; expenses).
For example, when a company sells a product to a customer, the inventory used is recorded as COGS (cost of goods sold) on the income statement.
The correct accounting definition, measurement, recognition and disclosure of current assets is guided by the accounting standards and other regulatory requirements applicable in your specific circ*mstances (e.g., geographic region, company structure).
For example, the IFRS (International Financial Reporting Standards) Conceptual Framework for Financial Reporting defines an asset as:
“An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. [F 4.4(a)]”
Current vs. Non-Current Assets: What’s the Difference?
Current assets are short-term resources that can be used or converted into cash within 1 year, such as cash equivalents, accounts receivable and inventory. Non-current asset are long-term resources like land, property, equipment, goodwill, patents or investments with useful life of over 12 months.
Assets are the resources owned by a company in order to run and grow its business.
There are two main types of assets on a company’s balance sheet: current assets and non-current assets. Within these two categories, there are many subcategories and line items.
Current assets are generally listed at the very top of a balance sheet, followed first by the non-current assets and then the combined total asset balance.
| Balance Sheet: Company X | ||
|---|---|---|
| Cash and Cash Equivalents | 1,000,000 | |
| Short-term Investments | 1,000,000 | |
| Net Receivables | 1,000,000 | |
| Inventory | 1,000,000 | |
| Other Current Assets | 1,000,000 | |
| Total Current Assets | 5,000,000 | |
| Long-term Investments | 1,000,000 | |
| Property, Plant and Equipment | 1,000,000 | |
| Intellectual Property | 1,000,000 | |
| Goodwill | 1,000,000 | |
| Accumulated Depreciation and Amortization | 1,000,000 | |
| Deferred Charges | 1,000,000 | |
| Other non-current assets | 1,000,000 | |
| Total non-current assets | 7,000,000 | |
| Total Assets | 12,000,000 | |
Current Assets
Current assets are short-term liquid resources that a company uses to run its daily operations and pay for immediate expenses because they are easily convertible to cash within a year.
Current assets are short-term liquid resources that a company uses to run its daily operations and pay for immediate expenses because they are easily convertible to cash within a year.
Examples of current assets include:
- Cash and cash equivalents
- Short-term investments
- Accounts receivable
- Inventory
- Pre-paid expenses
- Other liquid assets
Non-Current Assets
Non-current assets, also known as long-term or capital assets, are resources that are expected to be held for more than one year as they have a useful life of more than 12 moths and cannot be readily turned into cash.
Non-current assets, also known as long-term or capital assets, are resources that are expected to be held for more than one year as they have a useful life of more than 12 moths and cannot be readily turned into cash.
Non-current assets are used for the long-term needs of a business and include both tangible and intangible resources:
- Tangible assets, or fixed assets, are physical things that we can touch, such as land, property, plant, and equipment.
- Intangible assets are non-physical things that do not exist in physical form, such as intellectual property like patents, trademarks and copyrights; or goodwill when a company acquires another company.
- Long-term investments are illiquid investments that will not mature or be converted to cash within 1 year.
| Differences Between Current and Non-current Assets | ||
|---|---|---|
| Difference | Current Assets | Non-Current Assets |
| Also known as | Short-term assets, liquid assets | Long-term assets, capital assets |
| Examples | Cash, cash equivalents, short-term marketable investments, accounts receivable, inventory and supplies, prepaid expenses | Tangible fixed assets (e.g., land, property, heavy equipment, vehicles), long-term investments, long-term deferred charges (e.g. taxes), intangible non-physical assets (e.g., patents, trademarks, copyrights, goodwill), depreciation and amortization |
| Use | Funding of current, immediate, day-to-day and short-term business needs | Funding of future and long-term needs |
| Liquidity | Equal to cash or convertible into cash within a year | Not expected to be converted into cash within one year |
| Balance sheet presentation | Listed at the top of a balance sheet and arranged according to liquidity | Listed below current assets |
| Valuation | Market value at market prices | Cost less depreciation or amortization |
| Revaluation | Revaluation is not common (but some current assets, like inventory, may be revalued) | Revaluation is common |
| Tax | Sales profit from trading activities | Capital gains |
Related Questions
Is land a current asset?
Land is not a current asset because current assets are short-term, liquid and marketable economic resources that a business can use or readily convert to cash within 1 year. Rather, land is a non-current asset, which is a long-term resource with a useful life of more than 12 months.
Is inventory a current asset?
Inventory is a current asset because current assets are defined as short-term liquid economic resources that a business uses to run its daily operations and pay for immediate expenses because they are easily convertible to cash within one year.
What are examples of non-current assets?
The list of non-current asset, or capital asset, examples includes:
- Land
- Property, plant and equipment (PP&E)
- Vehicles
- Long-term investments
- Long-term deferred charges (e.g., taxes)
- Depreciation and amortization
- Intellectual property (e.g., patents, trademarks, copyrights)
- Goodwill
What are examples of current assets?
The list of current assets examples includes:
- Cash and cash equivalents (e.g., cash on hand, petty cash, cash in bank)
- Short-term investments (e.g., liquid marketable equity and debt securities)
- Accounts receivable (i.e., trade and other non-trade receivables)
- Inventory stock and supplies (i.e., raw materials, components, work-in-progress and finished goods)
- Prepaid expenses (i.e., expenses paid for upfront that will be consumed in a future accounting period)
Current assets formula: How do you calculate current assets?
There are three formulas to calculate current assets:
1. Current Assets = Total Assets – Non-Current Assets
2. Current Assets = (Liabilities + Equity) – Non-Current Assets
3. Current Assets = Cash + Cash Equivalents + Short-Term Investments + Accounts Receivable + Inventory + Pre-Paid expenses + Other Liquid Assets
Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.
Sign up for our Newsletter
Get more articles just like this straight into your mailbox.
Related Posts
How To Do Bank Reconciliation in 4 Steps [Example+Template]
Read More »
Read More »
Purchase Discounts, Returns and Allowances: All You Need To Know
Read More »
Recent Posts
How To Do Bank Reconciliation in 4 Steps [Example+Template]
Read More »
Read More »
Purchase Discounts, Returns and Allowances: All You Need To Know
Read More »
