Current assets are the assets of the company that represent all the assets of the company. These current assets are expected to be released or consumed within a financial year during the normal operations related to the business. All the details about current assets show on the balance sheet of the company. These current assets are also known as Current accounts.
Current assets include cash, Stock inventories, Liabilities, cash equivalents, accounts receivables, short-term investments, and many other liquid assets. In other words, those assets which are held for a short period, known as current assets.
Types or key components of Current Assets With Example for Current Assets
All financial terms such as cash, Stock inventories, Liabilities, cash equivalents, accounts receivables, short-term investments are coming under Current assets. Let us know in brief about these current assets and also the role of these assets in a business.
- Cash and Cash Equivalent: These are the types of current assets which contain Certificates of deposits, money markets, and cash accounts. These are the short-term investment or commitments which can be easily converted into cash accounts when needed. For example:- These types of current assets include currency, treasury bills, government bonds (short-term), checking account balances, etc.
- Stock Inventory: The term stock inventory includes raw materials, finished products, and other components which come under current assets. These are not liquid as other current assets so if the demand of these inventory shifts as per the requirements then it can be backlogged also. These assets depend on the industry and products. For example:- Steel, Rubber, Vehicles, furniture, etc.
- Accounts Receivable: The term account receivables contains any type of liquid amount (money) owed by the customers for purchasing goods and services. The amount which is credited. This account receivable is considered current assets that are to be paid by the customers in the coming financial year. For example, Mobile phones recharge plans, Plans of Electricity, and wireless phones. If a business has sales tax to its customers based on the terms of the loan, the account receivable cannot be treated as part of the current assets.
- Marketable Securities: Marketable securities for any business are such liquid financial instruments that can be easily converted into cash at fair value when the need arises. These marketable securities have a maturity period of more than one year and the rates at which marketable securities are bought and sold. These rates have a great impact on the prices of these marketable securities.
- Prepaid Expenses: The term prepaid expenses are those current assets that represent the advance payment made by any company for goods and services. However, such assets cannot be paid in cash as they are already paid. Prepaid expenses for any business can include payments to insurance companies or payments to other contractors. For example prepaid plans, rent, insurance, etc.
- Other Liquid Assets: Liquid assets in any business are those current assets that are any item of financial value to that business or individual. Liquid assets are assets of any business that can be easily and safely exchanged for legal tender. Assets like Inventory, Stocks, account receivables come under the category of liquid assets. These liquid assets can be easily converted into hard cash as and when required.
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Formula For Current Assets
Usually, Current assets are the summation of all the assets of the business or company, which can be converted into cash within a financial year as per requirements. Or simply we can determine current assets by adding all those assets of any business which can be converted into cash during the fiscal year. For example, assets appear on the company’s balance sheet
Current Assets Formula: The formula which is given below is used to calculate total current assets of a business or company. The formula is also used at the time of preparing balance sheets.
C+ CE + I + PE + MS + AR + OLA
In the Above Formula,
C stands for Cash
CE stands for Cash Equivalents
I stands for Inventory
PE stands for prepaid expenses
MS stands for Marketable Securities
AR stands for account receivables
OLA stands for Other liquid assets
For example: Let suppose a company had these current assets in 2019:
|Cash (C)||$10 million|
|Cash Equivalents (CE)||$0 million|
|Total account receivables (AR)||$5 million|
|Total Inventory (I)||$10 million|
|Marketable Securities (MS)||$2 million|
|Prepaid Expenses (PE)||$5 million|
|Other Liquid assets (OLA)||$2 million|
|Total Current Assets||$34 million|
Real-world example: As of December 2019, Microsoft Corp. had both cash and short-term investments.
|Current Assets (CA)||Cost|
|Cash and short-term investments||$134.25 billion|
|Total account receivables (AR)||$23.53 billion|
|Total Inventory (I)||$1.82 billion|
|Other Liquid Assets (OLA)||$7.47 billion|
|Total current assets||$ 167.07 billion|
Similarly, we can easily calculate other company’s total current assets by adding all the assets of the company. It will include all types of investments made by the company or business.
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Importance of Current Assets
Current assets play a most important role to show the liquidity of a business and appear under financial statements on a company’s balance sheets. There are so many advantages of Current assets, which are as follows:-
- Current assets determine the working capital of the business and its current ratio so that payment can be made without taking any kind of loan from outside.
- Current Assets help in determining the liquid assets of the company by being a part of various ratios.
- It also shows how the expenses incurred in the day-to-day operations of the company, how these operations are costing money.
- With the help of these current assets, the stakeholders get to know about the liquidity of the business.
- Current assets for any business help meet the expenses incurred in their day-to-day activities.
- Current assets also reflect the short-term financial position of the company so that the cash available with the company to meet its day-to-day operations.
What are Current Liabilities- Definition
Current liabilities are short-term financial obligations of a company that are paid by the company during a financial year. These current liabilities also occur even within a normal operating cycle. This occurs when the company takes time to buy inventory or convert cash from sales. These Current liabilities are also known as short-term liabilities. For example:- Money owed to suppliers as accounts payable, short-term debts, notes payable, income taxes payable, dividends, etc.
These current liabilities are decided only through current assets or we can say that current liability is the reputation of any business depending on the current asset.
Here is the list of most common current liabilities which can be easily found on the balance sheets of any business. These are as follows:
- Dividends Payables
- Accounts payable ( Money owed to Suppliers)
- Income tax owed by the firm to be paid within one financial year.
- Interest payable on debts and long-term obligations.
- Short-term debts
- It also includes maturities of long-term debts.
- Note Payables
- It also includes a refund amount paid to the customers if work is not complete or due to some other reason.
Difference between Current Assets and Current Liabilities
Both the terms are Current Assets and Current Liabilities relatable to each other.There are so many differences between Current Assets and Current Liabilities. The one major difference between current assets and liabilities is that current liabilities indicate the amount which has to be paid by the businesses whereas current assets ensure the total assets which can be converted into cash.
|Criterias||Current Liabilities||Current assets|
|Definition and Meaning||Current Liabilities are short-term financial obligations of a company that are paid by the company during a financial year.||Current assets are expected to be released or consumed within a financial year.|
|Why is it necessary to calculate?||By Current Liabilities of business, can get the amount to be paid in future (within one financial year)||With the help of current assets, stakeholders can get a view of the liquidity of the business.|
|Examples of Key Components||It include Money owed to suppliers as accounts payable, short-term debts, notes payable, income taxes payable, dividends, refund amount paid to the customers, Interest payable, Short-term debts, etc.||It include cash, Stock inventories, Liabilities, cash equivalents, accounts receivables, short term investments, Prepaid expenses, Other liquid assets, etc|
|Financial Statement on Balance sheets||Current Liabilities appear on the company’s balance sheets on the left side.||Current assets appear on the company’s balance sheets on the right side.|
|Also Known as||Current Liabilities are also known as short-term liabilities||Current Assets are also known as short-term assets.|
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