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.

  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?

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  3. What is the Difference Between Liquidity and Liquid Assets?

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  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 >>
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