Current Assets


DEFINITION of 'Current Assets'

A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

In the United Kingdom, current assets are also known as current accounts.


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BREAKING DOWN 'Current Assets'

Current assets are important to businesses because they can be used to fund day-to-day operations and pay ongoing expenses. Depending on the nature of the business, current assets can range from barrels of crude oil, to baked goods, to foreign currency. On a balance sheet, current assets will normally be displayed in order of liquidity, or the ease with which they can be turned into cash. 

Assets that cannot feasibly be turned into cash in the space of a year – or a business' operating cycle, if it is longer – are not included in this category and are instead considered "long-term assets." These also depend on the nature of the business, but generally include land, facilities, equipment, copyrights and other illiquid investments.

Accounts receivable, bills to customers that have yet to be paid, are considered current assets as long as they can be expected to be paid within a year. If a business has been making sales by offering loose credit terms, a chunk of its accounts receivables might not come due for a longer period of time. It is also possible that some accounts will never be paid in full. This consideration is reflected in an allowance for doubtful accounts, which is subtracted from accounts receivable. If an account is never collected, it is written down as a bad debt expense.

Inventory is included as current assets, but this item should be taken with a grain of salt. Different accounting methods can be used to inflate inventory, and in any case it is not nearly as liquid as other current assets. It may not even be as liquid as accounts receivable, which can be sold to third-party collection agencies in a pinch, albeit at a steep discount. Inventories tie up capital, and if demand shifts unexpectedly—which is more common in some industries than others—inventory can become backlogged. A seemingly healthy current assets balance can obscure a weak inventory turnover ratio and other problems.

Prepaid expenses are considered current assets not because they can be converted into cash, but because they are already taken care of, which frees up cash for other uses. As the year progresses, the value of prepaid expenses as assets decreases; they are amortized to reflect this fact. Prepaid expenses could include payments to insurance companies or contractors.

Components of current assets are used to calculate a number of ratios related to a business' liquidity. The cash ratio is the most conservative: it divides cash and cash equivalents by current liabilities, and measures the ability of a company to pay off all of its short-term liabilities immediately.

The quick ratio or acid-test ratio is slightly less stringent: it adds cash and cash equivalents, marketable securities and accounts receivable, and divides the sum by current liabilities. This gives a more realistic picture of a company's ability to meet its short-term obligations, but can be skewed by a backlog of accounts receivable.

The current ratio is the most accommodating: it divides current assets by current liabilities. It should be noted that in addition to accounts receivable, this measure includes inventories, so it probably overstates liquidity in many cases, especially for retailers and other inventory-intensive businesses.

In personal finance, current assets include cash on hand and in the bank, as well as marketable securities that are not tied up in long-term investments. In other words, current assets are anything of value that is highly liquid. Current assets can be used to pay outstanding debts and cover liabilities without having to sell fixed assets.

  1. Liquidity

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  2. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient ...
  3. Restricted Cash

    Monies earmarked for a specific purpose and therefore not available ...
  4. Permanent Current Asset

    The minimum amount of current assets a company needs to continue ...
  5. Noncurrent Assets

    A company's long-term investments, in the case that the full ...
  6. Cash

    Legal tender or coins that can be used in exchange goods, debt, ...
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  1. Can working capital be negative?

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  2. Does working capital include prepaid expenses?

    The calculation for working capital includes any prepaid expenses that are due within one year, since such prepaid expenses ... Read Full Answer >>
  3. Do prepayments provide working capital?

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  4. How can companies use the cash flow statement to mislead investors?

    Cash flow is a means for most investors to examine the actual economics of a business they might invest in, especially from ... Read Full Answer >>
  5. What is the formula for calculating working capital in Excel?

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  6. How do you calculate company equity?

    Company equity, or shareholders' equity, is calculated by subtracting the company's total liabilities from its total assets. ... Read Full Answer >>
  7. What will examining a company's cash flow from operating activities tell an investor?

    When examining a company's cash flow from operating activities on its cash flow statement, an investor is able to understand ... Read Full Answer >>
  8. What is the difference between current and noncurrent assets?

    Assets can be divided into two categories: current and noncurrent. Current assets are items listed on a company's balance ... Read Full Answer >>
  9. What is the difference between current assets and fixed assets?

    Current assets, or short-term assets, are assets that can be converted into cash within one fiscal year or one operating ... Read Full Answer >>
  10. How do I calculate current liabilities in Excel?

    Current liabilities are debt obligations that are due within one year. Some examples of current liabilities that appear on ... Read Full Answer >>
  11. When are current assets converted to liquid assets?

    Current assets may be converted to liquid assets at any time, but by definition, they are expected to be either used up or ... Read Full Answer >>
  12. Are current assets liquid or capital?

    Current assets are considered liquid capital, while nonliquid, or illiquid, assets are usually grouped into other types of ... Read Full Answer >>
  13. What is the difference between a fixed asset and a current asset?

    Fixed assets are long-term, tangible assets such as land, equipment, buildings, furniture and vehicles. Fixed assets are ... Read Full Answer >>
  14. What is the difference between tangible and intangible assets?

    Tangible Assets Tangible assets are physical assets such as land, vehicles, equipment, machinery, furniture, inventory, stock, ... Read Full Answer >>
  15. What happens if a company doesn't think it will collect on some of its receivables?

    The accounts receivable account, or receivables for short, is created when a company extends credit to a customer based on ... Read Full Answer >>

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