Current Assets and Its Importance

What is Current Assets?

A Current Asset is the assets that are expected to be liquefied into cash within one operating cycle. Current assets are recorded and arranged in the balance sheet of business as per their order of liquidity and that is current assets definition. In this article we'll discuss topics like Current Assets Importance, current asset definition, is GST receivable a current asset and much more.

Note:

In case the operating cycle of a business is longer than 1 year. In such a case an asset that is assumed to be converted into cash in that operating cycle will be a current asset.

Importance of Current Assets

Current assets are important as it helps a business to fund their day to day operations and in meeting all the ongoing expense.

Current asset plays a very important role in determining the working capital and the current ratio of a business. So we've cleared why are current assets important here.

Current Assets Key Components

Here is the list of other key components that fall under the definition of current assets after the importance of current assets:

Cash & Cash Equivalent

Cash or cash equivalent is a type of current assets which is a line item in the balance sheet. These include currency, coins, cheques, bank amount and short term government bonds including treasury bills.

Accounts Receivables

Account receivable is an amount owed to a business for goods or/and services sold or delivered by that is expected to be received within the operating cycle.

Inventory

Inventory includes all such products or material that soon can be sold and is forming a part of current assets. Some of the common examples of inventory are raw materials, semi-finished products and finished products.

Prepaid Expenses

Prepaid expenses are the amount paid by a company in advance for goods and/or services that will be consumed in the future. The prepaid expenses are recorded under current assets in the balance sheet of a business. After the consumption of such goods, it is recorded as expenses in the statement of profit and loss.

Examples of Current Assets

See the current assets examples. Generally, the current assets are in the following order of liquidity in the balance sheet:

•  Cash in hand
•  Cash in Bank
•  Marketable securities
•  Accounts receivable
•  Inventory
•  Prepaid expenses
•  And other Liquid Assets

Determining Current Assets

If you are thinking what are current assets and how it will be calculated. Here is a formula to determine the total current asset of a business

Current Assets = Cash + Cash Equivalent + Marketable Securities + Accounts Receivable + Prepaid Expense + Other Liquid Assets

Points to Remember

•  Current Asset is the asset that is assumed to be converted into cash within one operating cycle.
•  Current Assets are arranged in the balance sheet as per the order of their liquidity
•  Current Assets help in meeting day to day business operational activities
•  Current Assets include cash & cash equivalent, marketable securities, accounts receivable, prepaid expenses and other liquid assets
•  Current asset helps in determining the working capital and the current ratio of a business