What Are Current Assets? How To Calculate Current Assets — Backoffice (2022)

You are very thirsty, and someone offers you either a glass of water or a glass of ice. Of course, you gladly accept the water—even if you’re hot—because it will immediately quench your thirst. Ice takes too long to melt.

Think of current assets—also often (and appropriately) referred to as liquid assets—as a glass of water that your business can “drink from” if it’s thirsty for cash. Your long-term asset, in turn, is that glass of ice—you can’t convert this asset into hard currency (ie, water) as quickly. Even if your business is on track for long-term success, current assets can help if you need extra cash to cover short-term expenses.

What are current assets?

Current assets—sometimes called liquid assets—are short-term assets that a company expects to use, convert to cash, or sell within a fiscal year or operating cycle. Non-current assets, on the other hand, are long-term assets that cannot be easily converted into cash within one year.

Understanding the different types of assets is important because it determines how they are listed on the balance sheet (a financial document that gives a snapshot of the financial health of a business at a particular point in time). There are three categories on the balance sheet: assets, liabilities, and equity. Since the balance sheet is arranged in order of liquidity and current assets are the most liquid assets, they are listed first under assets.

7 types of current assets

1. Cash and cash equivalents
2. Marketable securities
3. Account not yet received
4. Inventory
5. Supply
6. Prepaid expenses
7. Other liquid assets

While cash is the most obvious current asset, it is not the only one. Here are the seven main types of current assets, listed in order of liquidity (which is how they should be listed on the balance sheet).

1. Cash and cash equivalents

Cash is simple: It’s the amount of money you have in the bank. Cash equivalents, in turn, are things that can be easily converted into cash, such as short-term savings bonds, short-term investments and foreign currencies.

2. Marketable securities

Marketable securities are investments that can be easily converted into cash and traded on a public exchange. This applies to cryptocurrencies, for example, and other more standard marketable securities and short-term investments that are easy to sell.

3. Accounts receivable

Any outstanding debts or IOUs of your business are considered accounts receivable. It is money that a client or customer still owes you for services that have been rendered or goods that have been delivered.

4. Inventory

Inventory covers the products you sell and is listed on your balance sheet as finished goods, work in process, raw materials and supplies. However, not all inventory counts as current assets; any inventory that you think you will hold for more than a year should be considered a non-current asset and listed as such on your balance sheet.

5. Supply

Supplies are complicated because they are only considered current assets until they are used, at which point they become expenses. If your company has stock of not in use supplies, list them under current assets on your balance sheet.

6. Prepaid expenses

Prepaid expenses include anything you’ve paid for but expect to benefit from over time. If you’ve paid for a year’s lease or extended insurance policy, you have prepaid expenses. Report this on your company’s income statement for the period the payment covers.

7. Other liquid assets

This is a catchall category. If you have any other current assets that can be easily converted to cash within a year (such as promissory notes or tax refunds, for example) that do not fit into any of the above categories, list them here.

How to calculate current assets

Once you’ve listed your current assets on your balance sheet in the order outlined above, it’s easy to calculate your total current assets—just add them all up. Here is the formula:

Current Assets = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Supplies + Prepaid Expenses + Other Liquid Assets

Another way current assets can be applied to your balance sheet is to calculate the liquidity ratio. By showing you the balance of assets to liabilities, the liquidity ratio gives you an idea of ​​your company’s financial health and helps you understand whether it can meet its short-term financial obligations. Here are some common types of liquidity ratios.

Current ratio

Your current ratio is the ratio of current assets to current liabilities, which is the debt you must pay off during the year. Fortunately, this calculation doesn’t require advanced math. The formula to get your current ratio is:

Current Ratio = Current Assets / Current Liabilities

Fast ratio

Your quick ratio helps you understand how well your company can meet its financial obligations in a shorter period of time. Instead of looking at your total current assets, the quick ratio only considers assets that can be converted to cash within 90 days. Here is the formula to get your quick ratio:

Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / (Short-Term Debt + Accounts Payable + Accrued Liabilities and Other Debt)

Net working capital

Calculating net working capital gives you a clear picture of your company’s liquidity, short-term financial health and efficiency by showing you how much money you can have right now. It’s a meaningful and simple calculation. The formula for net working capital is:

Net Working Capital = Current Assets – Current Liabilities

Current asset FAQ

What are some examples of current assets?

Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies and prepaid expenses.

What is the difference between current and non-current assets?

Current assets are short-term assets that can be used or converted to cash within one year or one operating cycle. Non-current assets are long-term assets that are expected to be used by the company for more than one year or operating cycle.

Is cash a current asset?

Yes, cash is a current asset, as are “cash equivalents” or things that can be quickly converted to cash, such as bonds and short-term investments and foreign currencies.

source: https://www.shopify.co.id/blog/current-asset