Current Assets and Its Importance
A current asset is the assets that are expected to be liquefied into cash within one operating cycle. Current assets are recorded and arranged in the balance sheet of business as per their order of liquidity.
In case if the operating cycle of a business is longer than 1 year. In such a case an asset that is assumed to be converted into cash in that operating cycle will be a current asset.
Importance of Current Assets
Current assets are important as it helps a business to fund their day to day operations and in meeting all the ongoing expense.
Current asset plays a very important role in determining the working capital and the current ratio of a business.
Current Assets Key Components
Here is the list of other key components that fall under the definition of current assets:
Cash & Cash Equivalent
Cash or cash equivalent is a type of current assets which is a line item in the balance sheet. These include currency, coins, cheques, bank amount and short term government bonds including treasury bills.
Account receivable is an amount owed to a business for goods or/and services sold or delivered by that is expected to be received within the operating cycle.
Inventory includes all such products or material that soon can be sold and is forming a part of current assets. Some of the common examples of inventory are raw materials, semi-finished products and finished products.
Prepaid expenses are the amount paid by a company in advance for goods and/or services that will be consumed in the future. The prepaid expenses are recorded under current assets in the balance sheet of a business. After the consumption of such goods, it is recorded as expenses in the statement of profit and loss.
Examples of Current Assets
Generally, the current assets are in the following order of liquidity in the balance sheet:
- Cash in hand
- Cash in Bank
- Marketable securities
- Accounts receivable
- Prepaid expenses
- And other Liquid Assets
Determining Current Assets
Here is a formula to determine the total current asset of a business
Current Assets = Cash + Cash Equivalent + Marketable Securities + Accounts Receivable + Prepaid Expense + Other Liquid Assets
Points to Remember
- Current Asset is the asset that is assumed to be converted into cash within one operating cycle.
- Current Assets are arranged in the balance sheet as per the order of their liquidity
- Current Assets help in meeting day to day business operational activities
- Current Assets include cash & cash equivalent, marketable securities, accounts receivable, prepaid expenses and other liquid assets
- Current asset helps in determining the working capital and the current ratio of a business