What is a Current Asset?

Current Asset Definition

Current assets are resources your business owns and expects to convert into cash, sell, or consume in a year or the business cycle, whichever is longer. These are vital to fund your day-to-day operations and meet short-term obligations. 

Financial ratios such as the liquidity ratio, cash ratio, and current ratio use current assets.

Current Asset Types and Examples

A companys current assets include cash, cash equivalent, marketable securities, accounts receivable, inventory, and prepaid expenses.

• Cash Equivalent: This is the money you have on hand or in the bank. You use this for everyday expenses, like salaries, petty cash, supplies, or unexpected costs. Cash equivalents are investments that can be quickly turned into money, like treasury bills. They are very safe and can be sold rapidly without losing value.
• Marketable Securities: These are investments (long-term or short term investment) in stocks, bonds, or other securities that you can sell quickly on public markets. You invest in marketable securities to earn a return on excess cash while keeping it accessible in case you need funds rapidly.
• Receivables: This represents the money customers owe you for products or services they've already received but haven't paid for yet. You track these amounts and collect payments, turning credit sales into cash. Accounts receivable management involves invoicing clients and following up to ensure timely payments.
• Inventory: Inventory includes the goods and materials you hold for sale to customers. It works as a current asset by being sold in the ordinary course of business, turning your stock into working capital. Managing inventory efficiently ensures you have enough products to meet demand without tying up too much net working capital in an unsold stock.
• Prepaid Expenses: These are payments you've made in advance for goods or services to be received in the future, such as insurance, rent, or subscriptions. While not directly convertible to cash, prepaid expenses are a current asset by reducing future cash outflows since you've already covered these costs.

Your net current assets look like this on the balance sheet (in the financial statement), which follows the generally accepted accounting principles (GAAP): 

• Cash and Cash Equivalents: $7,000
• Marketable Securities: $3,000
• AR: $4,000
• Inventory: $6,000
• Prepaid Expenses: $1,000
• Total Assets: $21,000

How to Calculate Current Assets

Follow these steps to calculate your total current assets:

Gather Your Financial Information 

Start by collecting all your financial documents that list your assets. This includes financial statements, customer invoices (AR), inventory lists, marketable securities statements, and prepaid expenses.

List Each Type of Current Asset

• Cash and Cash Equivalent: Add up all your money from bank accounts and investments like treasury bills or money market funds that can be quickly converted to cash.
• Marketable Securities: Tally up the current stock, bonds, or short term investments' values.
• Account Receivables: Sum up all the money customers owe you for products or services they've already received but haven't paid for yet.
• Inventory: Calculate the total value of all goods and materials you currently have.
• Prepaid Expenses: Add up the total payments you've made in advance for services or goods you will receive in the future, like insurance premiums or rent.
• Add Up Current Assets: Once you have listed the total for each type of current asset (intangible asset, tangible assets), add these. This is your total current asset.

Current Assets Formula:

Total Current Asset = Cash and Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Prepaid Expense

This figure represents the liquid assets (without fixed assets) you have to cover short-term liabilities or expenses.

Difference Between Current Assets and Non Current Assets

When managing your finances, you'll need to distinguish between two types of assets: current and non current assets. 

Understanding the difference helps you gauge your business's or personal finances' health and liquidity.

Noncurrent assets are those that you hold for longer than a year. These are investments in your business or personal wealth that you don't look to convert into cash within the short term. A noncurrent asset can be property, plant, equipment (PP&E), long term asset, patent, or a trademark. These are crucial for long-term growth and stability. 

They represent your investments to ensure your business or financial situation improves. 

Here’s how you distinguish between the two in practice:

• Look at the liquidity: Can you quickly turn the fixed asset into cash (within a year)? If yes, it’s a current asset. It is non-current if it takes longer or is not meant for cash conversion.
• Consider the purpose: Are you using the liquid asset to meet immediate financial needs or to pay off short-term debts? It’s likely a current asset. Is the asset part of your long-term strategy for growth, such as a building or machinery? It’s a non-current asset.

For example, the money in your checking account is a current asset because you can use it immediately. However, the building you purchased for your business operations is a non current asset because it serves your long-term operational needs and cannot be quickly converted into cash without disrupting your business.

Current Assets vs. Current Liabilities

Current liabilities are short term obligations you must settle within a year.

These include accounts payable, short-term loans, debt, accrued expenses, and other debts due in the short term. Current liabilities signify what you owe and must pay back soon, and they are vital in understanding your immediate financial obligations.

Key Differences

• Nature: Current assets are economic resources that benefit your financial position and can be used to generate cash. Current liabilities are financial obligations that you need to pay off, reducing your available resources.
• Purpose: You use current assets to pay daily expenses and settle short-term debts. Current liabilities, however, are those day-to-day expenses and short-term debts that need to be paid off using your current assets.
• Impact on Cash Flow: Current assets increase your liquidity, meaning they can easily be turned into cash or are already in cash form. Current liabilities require cash outflow, meaning they will reduce your available cash when settled.

For example, suppose you have $10,000 in your business checking account (a current asset) and owe $5,000 in total liabilities to suppliers (current liability); you use a portion of your current assets to settle your current liabilities, affecting your cash flow.

Accounting Software and Current Assets

Accounts receivable software plays a crucial role in managing your current assets by streamlining and automating the process of tracking money owed to you by customers for goods or services provided on credit. 

Here’s how AR software helps with current assets:

• Improves Cash Flow: By efficiently managing your invoices and payments, AR software helps ensure that payments are received on time. Timely receivables collection increases your liquid assets, directly boosting your cash flow. This is crucial for covering short-term liabilities and operational costs.
• Enhances Accuracy: AR software minimizes human errors in billing and account management. It automatically updates customer accounts with new invoices, payments received, and outstanding invoices. This accuracy ensures that your current asset figures are always up-to-date and reliable, clearly showing your financial health.
• Increases Efficiency: Automating the invoicing and collection process saves time and resources. AR software often includes features like automatic invoice generation, sending payment reminders to customers, and reconciling payments. This efficiency allows you and your staff to focus on other business aspects of operations rather than manual bookkeeping tasks.
• Financial Modeling Data: With AR software, you can access financial modeling data of your accounts receivable. You can quickly get financial reporting data about identify trends, such as which customers are consistently late on payments or how fast you turn receivables into money. These insights can inform strategic decisions about credit policies, payment terms, and cash management practices.
• Enhances Customer Management: AR software includes tools for managing customer relationships, such as tracking communication history, payment preferences, and dispute resolution. Through positive customer relationships, you can encourage prompt payments, negotiate better net terms, and potentially increase sales, which positively impact your current assets.
• Reduces Delinquencies: Automated reminders and easy payment options can reduce late payments and delinquencies. Prompting customers before due dates and providing simple online payment methods can significantly increase the collection speed, thereby maintaining a healthy current asset level.
• Facilitates Reporting and Compliance: AR software can generate detailed reports on your receivables, aging reports, and forecast cash flow, essential for internal financial management and external reporting requirements. Accurate and timely financial reporting helps maintain transparency and compliance with regulatory standards.

FAQs

1) What are examples of current assets? 

You find current assets in forms like cash and cash equivalents, marketable securities, accounts receivable, inventory, and prepaid expenses. You can quickly turn these resources into cash within a year to handle your immediate financial needs.

2) What is current and non current assets?

Current assets are resources you can convert into cash within one year, like cash, inventory, and accounts receivable. Non-current assets are long-term investments or property you have held for over a year, such as buildings, equipment, and patents.

3) What are current assets and liabilities? 

Current assets are resources you can turn into cash within a year, like cash, inventory, and accounts receivable. Current liabilities are what you owe and need to pay within a year, such as accounts payable and short-term loans.

4) What is a good current asset?

A good current asset is one you can quickly convert into cash without losing value, like cash itself, marketable securities, or customer invoices (accounts receivable). These assets help you meet short-term obligations and keep your operations running smoothly.

5) What are 20 examples of current assets?

You have current assets like cash in hand, checking and savings account balances, money market accounts, treasury bills, short-term certificates of deposit, short-term government bonds, marketable securities, accounts receivable, notes receivable due within a year, inventory, prepaid expenses, insurance, rent, office supplies, raw materials, work in progress, finished goods, short-term investments, and accrued income.