Current assets are short-term resources that serve your immediate business needs, such as inventory or cash.
An asset is a term used for any type of valuable resource that an individual or a business owns.
Current assets are used to refer to resources owned by a business that are expected to be used or sold within a year, such as products you have in your inventory. These are important for your liquidity, and help you pay your suppliers, cover your loan payments, and manage unforeseen expenses.
Common examples
Common examples of current assets include:
- Cash in your cash register or in the bank
- Inventory, in other words products you’re going to sell to clients
- Accounts receivable, which is what we call payments that are due to you from your clients. If you’ve invoiced a client for a product or service, but not gotten paid yet, that’s considered parts of your accounts receivable.
- Prepaid expenses, such advance payments for items like insurance policies or software subscriptions.
What characterises current assets?
They are
- actual, tangible goods that are likely to be used up or turned into cash within a year
- objects with financial benefits that help you cover day-to-day expenses through sales or use.
- exempt from deprecation, which is an accounting term that says that the value of assets should be reduced as time goes on. For example, if you buy a car, the car will be entered in your accounts with its current value, but as we all know, cars loose their value over time. Deprecation is what we call reducing the value in our bookkeeping. But current assets should not be depreciated since they’re going to be used or sold quickly.
Business owners, investors and creditors monitor current assets to assess a business’ ability to meet short-term obligations. Various liquidity ratios that include current assets, such as the current ratio, quick ratio, and cash ratio, provide insights into a company’s financial health.
What is a non-current asset?
While current assets are due to become cash within a year, non-current assets, have a longer conversion timeline, and should be depreciated. Common examples include property and equipment.