What is Current Assets

Also known as liquid assets, current assets include everything a company expects to sell, use, or convert to cash within a year or within its operating cycle. For a business, current assets act as a financial cushion, enabling it to fund day-to-day operations and meet short-term obligations. These involve cash or cash equivalents, such as marketable securities, accounts receivable representing amounts owed, unsold goods, prepaid expenses, or inventory with raw materials. 

When current assets are managed effectively, they guarantee sufficient liquidity, which promotes the smooth functioning of the business activities. 

What Are The Types Of Current Assets

Ensuring seamless business operations and maintaining stability under different types of current assets are essential. 

Cash & Cash Equivalents: These types of current assets include cash on hand and funds held in checking or savings accounts. Furthermore, the cash equivalents include the short-term investments and savings bonds that can be converted to cash quickly. 

Marketable Securities: In the public market, a company's investments, such as bonds and stocks, can be traded easily. Marketable securities offer a source of liquidity as they can be sold quickly to raise cash for the business if needed. 

Accounts Receivable: This current asset shows the amount owed to a company by its customers for services rendered or goods sold on credit. Accounts receivable are classified as current assets because they are expected to be collected within a short period, generally within 1 year. 

Inventory: The goods held by the company for sale or use in production. It has finished goods, work in progress, or raw materials. While inventory ties up capital, it is considered a current asset because it is expected to be sold or used within the operating cycle. 

Supplies: Resources for businesses held for future use in operations. These include office supplies, maintenance materials, and other consumables necessary for daily operations. 

Prepaid Expenses: Prepaid expenses are payments made in advance for services or other benefits to be received over time, such as prepaid rent, taxes, or insurance premiums. 

Other liquid assets: This category of current assets includes additional assets that can be converted easily into cash within one year and do not fit into the categories above. For example, tax refund, promissory notes, and so on. 

Calculation Of Current Assets

The following is the current assets formula:

Current Assets = Cash [C] + Cash equivalents [CE] + Inventory [I] + Accounts Receivable [AR] + Marketable Securities [MS] + Prepaid Expenses [PE] + Other Liquid Assets [OLA]. 

An Example Of Current Assets

In December 2019, the company XYZ had. 

• Cash [C] = Rs 5,00,00,000. 
• Cash Equivalents [CE] = Rs 20,00,000. 
• Marketable Securities [MS] = Rs 4,00,00,000. 
• Accounts Receivable [AR] = Rs 2,00,00,000. 
• Inventory [I] = Rs 2,50,00,000
• Prepaid Expenses [PE]= Rs 1,00,00,000. 
• Other Liquid Assets [OLA] = Rs 1,50,00,000. 

Hence, the company's consolidated balance sheet for 2019 will look like this.

Henceforth, the current asset type for Company ABC in December 2019 will be Rs 16,20,00,000.