What are Current Assets?

What are current assets? A current asset is an asset that a company owns and is easily sold, consumed or converted into cash during a financial year due to the ordinary course of business operations.

In financial parlance, an asset is any valuable resource that a business entity owns. It can be anything tangible or intangible that creates an economic value for a business. Assets can be classified on the basis of convertibility, physical assets, and resources. On the basis of convertibility, the assets can be divided into current and non-current assets.

Definition of Current Assets

Current assets include cash and cash equivalents. In other words, current assets are those assets that last only for a year or less than a year. These provide the business with the money to clear the current year’s expenses.

Cash–in–hand, bank balances, debtors, stock, bills receivables, etc. are examples of current assets. The current assets are an important component for the calculation of the working capital and also the current as well as a quick ratio.

Types of Current Assets

• Cash and cash equivalent: It refers to those current assets that can be liquidated immediately. These include bank accounts, commercial papers, treasury bills and debt securities that contain a maturity date of three months or less.

• Inventory or stock: It includes raw materials, work-in-progress and finished goods.

• Pre-paid expenses: These include the expenses that a company pays in advance to receive the goods and services in future.

• Account receivables or debtors: These refer to the money that a firm owes from its customers for the goods and services delivered and expected to be received within one operational year.

• Marketable securities
• Bills receivables

Current Assets Formula

Current assets = Cash + Cash Equivalents + Bank Balances + Inventory + Accounts Receivables + Market Securities + Prepaid Expenses + Bills receivables + Other Liquid Assets

What are the uses of Current Assets?

• To clear regular payments and bills.
• To provide an insight into the company’s cash and liquid position
• Helping the investors and creditors to analyse the risk or benefits of the company’s operations.

Current Assets Examples

• Cash and Cash Equivalents
• Marketable Securities
• Accounts receivable
• Inventory
• Prepaid expenses

Total Current Assets

Total current asset refers to the aggregate of all cash, prepaid expenses, receivables, and inventory of the business.

What are Non-Current Assets?

Non-currents assets refer to long term investments that cannot be easily converted into cash or cash equivalents. The whole value of these assets cannot be utilised during a financial year. Thus, these are also called fixed assets. Land, buildings, furniture and fixtures, patents, trademarks, equipment and machinery are some examples of non-current or fixed assets.

Important Ratios That Use Current Assets
Current assets form an integral part of the formulae to ascertain the costs and profits of the financial year. Some of these are as follows:

1. Current ratio
2. Average current assets
3. Quick ratio
4. Net Working capital

What is the Current Ratio?

The current ratio is the ratio between the current assets and the current liabilities of the firm. It calculates or ascertains the capacity of a business to meet its short-term obligations and its liquidity. The ideal current ratio is 1:1.

Current Ratio = \(\frac{Current Assets}{Current Liabilities}\)

Current liabilities refer to the amount a firm owes to its creditors during a financial year. These include bank overdrafts, accrued expenses, accounts payable or creditors, bills payable, etc.

What is a Quick Ratio?

Quick ratio or acid-test ratio is the ratio between the quick assets and current liabilities.

Thus,

Quick ratio = \(\frac{Quick assets}{ Current Liabilities}\)

Quick assets =  Cash + Account Receivables + Marketable Securities

Or

Quick assets = Current Assets – Prepaid Expenses – Inventory

What is the formula for Net Working Capital?

Net Working Capital = Current Assets – Current Liabilities

How to Ascertain Average Current Assets?

Average Current Assets = \(\frac{Current Assets of the present year + Current Assets of the preceding year}{2}\)

FAQs on What are current assets?

Q.1. The cash balance of a firm is Rs. 20000. It has accounts receivables of Rs. 15000, prepaid expenses of Rs. 2000, inventory of Rs. 48000 and building of Rs. 100000. Its creditors are worth Rs. 5000. The bank overdraft amounts to Rs. 40000. Calculate the current ratio and the quick ratio.

Answer.

Current assets = Cash + Accounts receivables + Prepaid expense + Inventory

= 20000 + 15000 + 2000 + 48000 = 85000

Current liabilities = Creditors + Bank overdraft

= 5000 + 40000

= 45000

Quick assets = Current assets – prepaid expenses – inventory

= 85000 – 2000 –   48000 = 35000

Current Ratio = \(\frac{Current Assets}{Current Liabilities}\)

= \(\frac{85000}{45000}\)

= 17:9

Quick ratio = \(\frac{Quick Assets}{Current Liabilities}\)

= \(\frac{35000}{45000}\)

= 7:9

Q.2. The Current assets for the year 2020 were Rs. 450000, while the same for the year 2021 were Rs. 500000. Calculate the Average Current Assets.

Answer. Average Current Assets = \(\frac{Current Assets of the present year + Current Assets of the preceding year}{2}\)

= \(\frac{500000 + 450000}{2}\)

= Rs. 475000