A:

Current assets are considered liquid capital, while nonliquid, or illiquid, assets are usually grouped into other types of capital. For example, a company's workforce is often considered human capital. When listed on the balance sheet, current assets are those that can be converted into cash within one year. These include accounts receivable, most inventory, short-term marketable securities, actual cash and other short-term assets.

Personal Vs. Business Current Assets

For an individual or a household, current assets include accounts or securities used to cover liabilities or repay debts without having to sell, or liquidate, any fixed assets. The most obvious and most liquid asset is cash on hand or in-demand deposit accounts at the bank.

The nature and length of an investment must be considered before it can be labeled a current asset. Funds an individual has in a money market can be readily converted into cash without loss of value; funds held in a 30-year Treasury or long-term certificate of deposit (CD) do not count as liquid current assets because they usually involve some kind of fee to liquidate. Likewise, physical property is not a current asset even if it can be sold quickly.

The current assets of a firm are more strictly defined because of how they are reported in financial statements. Current assets are items a business owns and can be converted into cash or used up completely within one year of business. Common line items for current assets include cash and cash equivalents. Debt securities with less than one year to maturity are considered current assets. Accounting for a firm's inventory is a little more complicated, but generally speaking, inventory is considered a current asset.

Types of Capital

The term "capital" refers to slightly different concepts when used in economics or accounting. In accounting terms, capital means the financial, or monetary, value of assets owned by a company. When economists refer to the factors of production, capital is used to describe physical assets, such as factories and machinery, that are used in the production process

Current assets, or current accounts, is an accounting term. Current assets are considered liquid capital, but other types of capital are identified in financial accounting. Investment capital involves debt and equity financing; these are items that represent an obligation on behalf of the firm towards its investors.

A firm's liquidity is an important concern for managers, investors and lenders. With too few current assets, a company runs the risk of insolvency. That said, too many current assets and not enough investment capital can stunt the growth potential of the firm. This is because it is generally harder to earn a return on current assets than fixed assets. Management must balance the need for day-to-day operations with future expansion.

RELATED FAQS
  1. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
  2. What is the difference between a fixed asset and a current asset?

    Discover the difference between fixed assets and current assets and the value of each to a company. Learn the category and ... Read Answer >>
  3. What is the Difference Between Liquidity and Liquid Assets?

    Liquid assets can easily be converted into cash. Liquidity is the ability of a business to pay its debts using its liquid ... Read Answer >>
  4. What are some of the risks of holding liquid assets?

    Find out how the holders of liquid assets assume risks associated with opportunity cost and inflation in exchange for solvency ... Read Answer >>
Related Articles
  1. Investing

    Financial Analysis: Solvency vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health.
  2. Investing

    Working Capital Position

    Learn how to determine a company's working capital position to correctly analyze liquidity.
  3. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  4. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  5. Investing

    Ben Graham on Interpreting Financial Statements

    Seven pieces of advice from Benjamin Graham on understanding financial statements.
  6. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments.
  7. Investing

    How to Evaluate a Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  8. Investing

    Financial markets: capital versus money markets

    There are several key differences between capital markets and money markets as components of financial markets.
RELATED TERMS
  1. Permanent Current Asset

    The minimum amount of current assets a company needs to continue ...
  2. Fixed Asset

    A fixed asset is a long-term tangible piece of property that ...
  3. Quick Assets

    Anything having commercial or exchange value that can easily ...
  4. Short Term

    1. In general, holding an asset for short period of time. 2. ...
  5. Net Liquid Assets

    Net liquid assets are a strict measure of an immediate or near-term ...
  6. Marketable Securities

    Marketable securities are liquid financial instruments that can ...
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  4. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  5. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  6. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
Trading Center