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Current assets are short-term resources serving immediate business needs, such as such as inventory and cash.
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:
- 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.