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What are Current Assets?

Cash is the most common form of liquid or current asset.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 April 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Sometimes referred to as liquid assets, current assets are resources that are currently in the possession of the holder and could be converted into cash with a great deal of ease. Generally, these cash equivalents would demonstrate an ability to undergo this type of conversion within one calendar year or less from the current date. Just about every business and every household has resources that can reasonably be considered current assets.

One of the most easily identifiable forms is found in the Accounts Receivable of a company. In most cases, outstanding invoices issued to customers are expected to be paid according to the terms noted on the invoice. While 30 days is the norm for many businesses, it is not unusual for the terms of payment to be as much as 45 days from the invoice date before the invoice is considered overdue. Since payment of the outstanding invoices can be reasonably expected to occur in one year or less, outstanding Receivables are the perfect example of current assets.

Inventories are also good examples. This would include both raw materials that are intended for use in production, as well as finished goods on hand. The expectation is that the raw materials will be consumed in the manufacturing process within a calendar year, and the resulting finished goods will also be sold to customers within that same time frame.

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Bonds and other marketable securities also are often considered to be current assets. This is true when the bond will mature within the one-year period, allowing the bondholder to recoup the original investment plus interest. In the case of stocks and other securities, if the expectation is to sell the securities at a profit within the next calendar year, they also can be considered part of this group of resources. This is especially true since stocks are usually easy to convert into cash when necessary.

One form that is sometimes overlooked is prepaid expense. For example, a homeowner may choose to pay for one year of services related to a utility, grounds keeping, or other recurring expense. Businesses also sometimes prepay for an ongoing service as a means of avoiding a monthly task of submitting payment. In both cases, the prepaid expense is carried on the balance sheet and can rightly be counted among the current assets if the total prepaid amount will be consumed within the calendar year.

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Discuss this Article

serenesurface
Post 3

@burcinc-- When you calculate current assets, you can only count assets which can be sold in one year or less. Investments can be counted, if again, you are able to sell them in less than one year. In terms of loans, no they cannot be counted as assets. Even though it appears like you have money in the bank, it's not really yours, its borrowed so that is not a current asset.

burcinc
Post 2

What if the period of converting assets is more than one year, is it not considered a current asset? What about investments instead of cash? Or what if I have loans? Are these counted when calculating total current assets?

ysmina
Post 1

Liquidity and current assets were subjects we studied in college economics. The piece of information that really stuck with me from then, is that money is a liquid asset. It's the most basic liquid asset because it can be sold (spent) immediately. The longer it takes for an asset to be converted to something else, the less liquidity that asset has.

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