Current Assets Definition
This counts products that are sold for cash as well as resources that are consumed, used, or exhausted through regular business operations that are expected to provide a cash value return within a single year.
Usually the balance sheet will record current assets separately from other long-term assets or fixed assets, if applicable.
The ratio of current assets to current liabilities is called the current ratio and is used to determine a company’s ability to fulfill short-term obligations.
To find out a company’s current ratio, just divide its current assets by its current liabilities using the following equation:
Current Ratio = Current Assets / Current Liabilities
An important note is that only tangible assets can be counted as current.
Intangible assets such as trademarks, copyrights, intellectual property, and goodwill are not able to be converted easily into cash within a year, even if they still provide a company with economic value.
What Are Examples of Current Assets?
There are five main categories of current assets.
In order of most to least liquid, here is a list of current assets:
1. Cash and Cash Equivalents
Cash and cash equivalents are the most liquid of assets, meaning that they can be converted into hard currency most easily.
Cash of course requires no conversion and is spendable as is, once withdrawn from the bank or other place where it is held.
Cash equivalents are any type of liquid securities that are not in the form of cash currently, but that will be in the form of cash within a year.
US Treasury bills, for example, are a cash equivalent, as are money market funds.
2. Short-Term Investments and Marketable Securities
Similar to cash equivalents, these are investments in securities that will provide a cash return within a single year.
In the case of bonds, for them to be a current asset they must have a maturity of less than a year; in the case of marketable equity, it is a current asset if it will be sold or traded within a year.
3. Prepaid Expenses
They are not technically liquid because they don’t earn a company money; however, they are listed among a company’s current assets because they free up capital to be used later.
Payments to insurance companies or contractors are common prepaid expenses that count towards current assets.
A company can also choose to prepay rent it owes on buildings or real estate; however, only one year’s worth of that prepaid rent counts towards current assets.
If a company elects to pay for, say, three years of rent in advance, then the remaining 24 months of rent are not counted as a current asset.
4. Accounts Receivable
Accounts receivable are funds that a company is owed by customers that have received a good or service but not yet paid.
As usual, for these funds to be a current asset, they must be expected to be received within a year.
Accounts receivable are usually incurred when buyers pay a company for its products or services with credit.
Paying for a purchase with a credit card, for example, adds to the accounts receivable of the company from which the purchase was made.
Notes receivable are also considered current assets if their lifespan is less than one year.
Any inventory that is expected to sell within a year of its production is a current asset.
Inventory is the least liquid of all current assets because unlike short-term securities, which will always pay within a year, and accounts receivable, which a customer is obligated to pay, inventory must be actively produced and sold in order to convert into cash.
Likewise, not all inventory can reasonably be expected to sell within a single year; heavy machinery, particularly specialized machinery like airplanes or industrial equipment, may sit around in storage for a while before finding a buyer.
Inventory that is purchased by consumers and moves quickly is known as fast moving consumer goods, or FMCG, and is the primary type of inventory that also falls under the category of current assets.
Current Assets Formula
The equation for current assets is the following:
Current Assets = C + CE + I + AR + MS + PE + OLA
- C = Cash
- CE = Cash Equivalents
- I = Inventory
- AR = Accounts Receivable
- MS = Marketable Securities
- PE = Prepaid Expenses
- OLA = Other Liquid Assets
Examples of Current Assets
Depending on the industry of the company in question, a current asset could be anything from crude oil to foreign currency. For example, an auto manufacturer may count auto parts as a current asset. On the other hand, a mutual fund may count short term investments or bonds.
Current Assets Meaning
A current asset is any asset a company owns that will provide value for or within one year. Current assets are often used to pay for day-to-day-expenses and current liabilities (short-term liabilities that must be paid within one year). Current assets are important to ensure that the company does not run into a liquidity problem in the near future.
Current Assets and Current Liabilities
Current liabilities are essentially the opposite of current assets; they are anything that reduces a company’s spending power for one year. Examples include short term debts, dividends, owed income taxes, and accounts payable. Current liabilities are often resolved with current assets. If current liabilities exceed current assets, it could indicate an impending liquidity problem.
Current Asset FAQs
Current Assets Subtopics
- Are Bonds Current Assets?
- Are Buildings Noncurrent Assets?
- Are Construction Works-In-Progress a Current Asset?
- Are Debt Investments Current Assets?
- Are Fixed Assets Current Assets?
- Are Intangible Assets Current Assets?
- Are Investments Current Assets?
- Are Marketable Securities Current Assets?
- Are Office Supplies a Current Asset?
- Is Short Term Investment a Current Asset?
- Are Supplies a Current Asset?
- Is Accounts Payable a Current Asset?
- Is Accounts Receivable a Current Asset?
- Is Accounts Receivable a Material Component of a Company’s Total Current Assets?
- Is Accumulated Depreciation a Current Asset?
- Is a Loan a Current Asset?
- Is a Patent a Noncurrent Asset?
- Is Bank a Current Asset?
- Is Cash a Current Asset?
- Is Current Assets the Same as Total Assets?
- Is Deferred Tax a Current Asset?
- Is Depreciation a Current Asset?
- Is Equipment a Current Asset?
- Is Fixed Deposit a Non Current Asset?
- Is Goodwill a Current Asset?
- Is Interest Receivable a Current Asset?
- Is Inventory a Current Asset?
- Is Inventory a Current Or Non-Current Asset?
- Is Land a Current Asset?
- Is Machinery a Current Asset?
- Is Merchandise Inventory a Current Asset?
- Is Net Working Capital a Current Asset?
- Is Office Furniture a Current Asset?
- Is Petty Cash a Current Asset?
- Is Plant Assets a Current Asset?
- Is Premises a Current Asset?
- Is Property, Plants and Equipment a Current Asset?
- Is Restricted Cash a Current Asset?
- Is Retained Earnings a Current Asset?
- Is Service Revenue a Current Asset?
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.