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What are current assets

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 play a crucial role in a company’s day-to-day operations as they can be converted into cash, enabling the business to meet its daily expenses, bills, and loan obligations – collectively known as its current liabilities.

Key characteristics

  • Tangibility: Current assets are often tangible, physical items that are expected to be utilized or transformed 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:

  1. Cash: Funds in the till or bank.
  2. Inventory: Goods intended for sale to customers.
  3. Accounts Receivable: Payments due to the company.
  4. 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.