Current assets are short-term resources serving immediate business needs, such as such as inventory and cash.
Definition
Current assets refer to the resources owned by a business that are expected to be used or sold within a year. These assets are essential to a business’s daily operations because they may be turned into cash, which helps it pay its bills, satisfy its loan obligations, and cover other expenses that are collectively referred to as its current liabilities.
Key characteristics
- Tangibility: Typically, current assets are actual, tangible goods that should be used up or turned into cash within a year.
- Financial Benefit: They provide financial benefits by facilitating the coverage of day-to-day expenses through sales or use.
- Depreciation Exemption: Unlike some assets, current assets are not subject to depreciation.
Examples of current assets
Common examples of current assets include:
- Cash: Funds in the till or bank.
- Inventory: Goods intended for sale to customers.
- Accounts Receivable: Payments due to the company.
- Prepaid Expenses: Advance payments for items like insurance policies or software subscriptions.
Current Assets vs. Non-Current Assets
While current assets are convertible to cash within a year, non-current assets, like property and equipment, have a longer conversion timeline and are subject to depreciation.
Formula for Current Assets
Current Assets = C+CE+I+AR+MS+PE+OLA
Where:
- C = Cash
- CE = Cash Equivalents
- I = Inventory
- AR = Accounts Receivable
- MS = Marketable Securities
- PE = Prepaid Expenses
- OLA = Other Liquid Assets
How do business owners use current assets?
Business owners, investors and creditors closely monitor current assets to assess a company’s ability to meet short-term obligations. Various liquidity ratios, such as the current ratio, quick ratio, and cash ratio, provide insights into a company’s financial health.