Current Assets: Definition, Types & Examples

KEY TAKEAWAYS

• Current assets are a company’s short-term investments, used to finance its daily operations.
• Current assets include cash and cash equivalents, inventory, and accounts receivable other assets that can convert into cash in one year.
• Current assets are important to a company because they provide the funds necessary to pay for expenses and keep the business running.

What Are Current Assets?

Current assets are those assets that easily convert into cash in a year. This includes things like cash and investments, inventory, and accounts receivable.

There are two main types of current assets: liquid assets and non-liquid assets. Liquid assets are those that can be quickly converted into cash, such as cash itself or investments that can be readily sold. Non-liquid assets take longer to convert into cash, such as inventory or accounts receivable.

Let’s explore some examples and discuss current assets further. We will also take a look at its formula and uses.

Components of Current Assets

Now that we know what current assets are, let’s explore some of the different types in more detail.

Cash: This is the most obvious type of current asset. It includes cash on hand, as well as money in checking and savings accounts. 

Investments: These are another type of liquid asset, and include things like stocks, bonds, and mutual funds. They can sell quickly to generate cash if needed. 

Accounts receivable: This refers to the money owed to a company by its customers. It is an asset because it will eventually get paid, although it may take longer than a year.

Inventory: Inventory refers to the raw materials or finished products that a company has on hand. The cost of inventories is a non-liquid asset because it takes time to sell, and the value may fluctuate. You might also include storage costs.

Current assets are important components of a company’s balance sheet and financial statements. Current assets are items that a company expects to convert to cash in one year. Examples of current assets include cash, accounts receivable, inventory, and short-term investments. 

A company’s current liabilities are obligations that are due within one year. Current liabilities are important because they represent the amount of money that a company owes to its creditors. A company’s current ratio is a liquidity metric. It measures a company’s ability to pay its current liabilities with its current assets. 

A company’s balance sheet is a financial statement. It provides an overview of the company’s assets, liabilities, and equity. The balance sheet can assess a company’s financial health and calculate important ratios such as the current ratio. 

Current assets are important for companies. They represent the funds that a company has available to pay its current liabilities. A company’s operating cycle is the time it takes to convert its inventory into cash. The operating cycle is an important metric for companies because it can impact working capital and liquidity. 

Short-term assets are items that a company expects to convert to cash in one year. Examples of short-term assets include cash, accounts receivable, and short-term investments. 

Noncurrent assets are items that a company does not expect to convert to cash in one year. Examples of noncurrent assets include long-term investments, property, plant, and equipment. 

Working capital is the difference between current assets and current liabilities. It represents a company’s ability to pay its short-term obligations.

Formula for Current Assets

Now that we know the different types of current assets, let’s look at the current assets formula.

This equation is pretty straightforward. You simply add up all of the cash and other assets that can easily convert into cash in a year.

It’s important to understand the difference between short- and long-term assets. Your income statement needs to be accurate at all times. You need to know what your cash ratio looks like in relation to your liquidity ratios. 

Uses of Current Assets

Current assets function in different ways. First, they can work to finance day-to-day operations. This includes things like paying employees or buying raw materials. 

Second, they can work to invest in new projects or expand the business. This might involve upgrading equipment or opening new locations. 

Finally, they can work to pay off debts or other liabilities. This can help a company improve its financial health and avoid defaulting on its loans.

Current assets are an important part of a company’s financial health. They can work to finance operations, invest in new projects, or pay off debts. Understanding the different types of current assets and how to calculate them is essential for any business owner or manager.

Examples of Current Assets

Current assets are just one part of a company’s overall financial picture. To get a complete picture, you also need to look at things like liabilities and equity. But understanding current assets is a good place to start.

Let’s turn our attention to some examples of current assets to help you gain a clearer picture of their role and function.

Cash and cash equivalents. This includes things like cash on hand, money in checking and savings accounts, and short-term investments. 

Accounts receivable. This refers to the money owed to a company by its customers. 

Inventory. Inventory refers to the raw materials or finished products that a company has on hand. 

Prepaid expenses. These are payments made in advance, such as insurance premiums or rent. 

Other current assets. This category includes any other asset that can be quickly converted into cash. I.E., investments or marketable securities.

Summary

Current assets are those that can be quickly converted into cash. This includes cash itself, as well as investments, accounts receivable, and inventory. 

Current assets are important components of your balance sheet and financial statements. Current assets are items that you expect to convert to cash within one year. 

Operating cycle is the time it takes to convert your inventory into cash. Short-term assets are items that you expect to convert to cash within one year. Noncurrent assets are items that you do not expect to convert to cash in one year. Working capital is the difference between your current assets and current liabilities. 

Working capital is important because it represents your ability to pay short-term obligations. Current liabilities are important because they represent the amount of money that you owe to creditors. 

Current ratio measures your ability to pay your current liabilities with your current assets. The operating cycle is an important metric because it can impact your working capital and liquidity.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.