What is a Current Asset?
Current assets are assets that are expected to be consumed or sold within a fiscal year. They can be both tangible and intangible. Current assets are shown in the assets section of a company’s balance sheet. They can be a useful indicator of a business’s liquidity.
Examples of current assets
In accounting, cash and near-cash assets are always considered to be current assets. Examples of near-cash assets include:
- Cash Equivalents (such as short-term bonds and marketable securities)
- Prepaid Expenses
Similarly, other liquid assets will also be classed as current assets. These would typically include accounts receivable and inventory. There can, however, be nuance here.
For example, if a business has a long-term relationship with a client, it is possible that they might be given more than a year to pay for products and/or services. In this instance, some or all of the credit line would have to be classed under non-current assets (also known as long-term assets).
Alternatively, there might be some doubt over whether a customer will actually pay their bill in full and on time. In this instance, some or all of the credit line would be moved to the allowance for doubtful accounts.
Similarly, if a company’s inventory includes a lot of niche, tangible assets, it might be more reasonable to treat them as illiquid assets. This is because it will probably be difficult for them to be converted into cash both quickly and at a fair value.
Listing assets on a balance sheet
The standard accounting convention is to list assets in order of most liquid to most illiquid. This means that current assets are shown before noncurrent assets. Both current assets and long-term assets are usually further broken out into their component parts.
For current assets, the first item will always be cash (assuming the company has it). This is generally followed by cash equivalents. Listing the non-cash assets is often a matter of judgement. In general, however, intangible assets will be listed higher than tangible assets.
Long-term assets follow the same pattern. They are unlikely to include cash but may contain some cash equivalents such as long-term bonds. Similarly, they won’t have marketable securities but may have long-term investments.
The bulk of a company’s tangible assets will probably be under the long-term assets section of its balance sheet. It will certainly include any fixed assets such as real estate. It can, however, also include intangible assets such as goodwill.
Current assets vs current liabilities
Although current assets are important, they are just one part of a company’s overall financial position. They only really have meaning when looked at in context. In particular, they need to be compared to a business’ current liabilities.
Current liabilities are the obligations a business must meet within a fiscal year. Most current liabilities are costs related to business operations. For example, they would include payments to employees and suppliers as well as dividends to shareholders and company taxes.
Stakeholders will often compare current assets to current liabilities to help them understand a company’s actual liquidity. They may extend this to looking at non-current assets and non-current liabilities to get an idea of a company’s future prospects.
The importance of accurate valuation
In addition to making sure that assets are put into the right section of the balance sheet, it’s vital to make sure that they’re valued accurately. This is probably more of a concern for long-term assets as their values could be influenced by appreciation, depreciation and/or amortisation.
Once you have determined a strategy for valuing your assets (and liabilities) accurately, it’s important to use it consistently. This is the only way stakeholders will be able to judge your company’s performance over time.
This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.
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