Current Assets | Meaning, Types, Formula and Calculation

What are Current Assets?

Current Assets refer to the assets held by the business with the objective to transform them into cash within a period of one year. Current assets are resources that a corporation holds and plans to change into cash throughout the fiscal year. These are sold, exhausted, or consumed because of the normal course of commercial activities. A current asset is vital for a business since it allows them to access money on a daily basis to settle current business expenses. In simple terms, current assets are assets that are expected to last for a year or less. Current Assets have many benefits. They are often used to settle recurring payments and liabilities. It provides information regarding the company’s cash and liquidity status. Investors and creditors thoroughly examine the company’s current assets to assess the risks and advantages to deal with the business. Current Assets have many components. Following are the various components that help to determine the worth of the enterprise.

What are the Types of Current Assets?

Current Assets have many components. The following are the various components that help to determine the worth of the enterprise:

1. Cash and Cash Equivalents

Assets under the head of the Current Assets are cash or cash equivalents that can be immediately converted into cash. Certificates of deposit, money market funds, short-term government bonds, and treasury bills are all examples of cash equivalents. These represent the balance-sheet items that can be liquidated within one financial year.

2. Account Receivables

The amount of money owed by clients for the goods and services supplied to them is called Account Receivables. The company anticipates receiving money from these debtors within one financial year. Although at times a company is unable to recover the total sum from its customers. These are classified as bad debts by the corporation and do not come under the head of current assets.

3. Prepaid Expenses

Prepaid expenses are regarded as current assets because they represent advance payments made by the company for products and services to be obtained in the future. Such current assets cannot be converted into cash by a business. These payments liberate capital for other use. Payments of insurance premiums or payments to contractors are examples of prepaid expenses.

4. Inventory

Inventory includes raw materials, components, and finished products and is hence considered under Current Assets. Businesses use several accounting methods to determine the inventory likewise LIFO (last-in, first-out) and FIFO (first-in, first-out).

5. Marketable Securities

Marketable Securities is the account in which the total amount of liquid investments that can be converted into cash without diminishing their market value is recorded.

Formula to Calculate Current Assets

A total current asset is the total of all cash, accounts receivable, prepaid expenses, and inventory on the balance sheet of the company. The formula for the current asset is a simple aggregate of all assets which can be converted to cash during a financial year. The formula for determining the current asset account is shown below:

Current Assets = Cash and Cash Equivalents + Accounts Receivables + Marketable Securities + Inventory + Prepaid expenses + Other Liquid Assets

How to Calculate Current Assets?

To find out the value of current assets in the company, it is important to know the value of Cash and Cash Equivalents, Accounts Receivables, Marketable Securities, Inventory, Prepaid expenses, and Other Liquid Assets according to the formula.

Illustration:

A company named Gautam Enterprises deals in automobiles and has the following assets:

Cash and Cash Equivalents = ₹12,000

Machinery = ₹40,000

Marketable Securities = ₹24,000

Debtors = ₹12,150

Building = ₹54,000

Furniture = ₹10,000

Prepaid expenses = ₹4,000

Inventory = ₹5,000

Other Liquid Assets = ₹11,000

Solution:

Current Assets = Cash and Cash Equivalents + Marketable Securities + Debtors + Prepaid expenses + Inventory + Other Liquid Assets

= 12,000 + 24,000 + 12,150 + 4,000 + 5,000 + 11,000

= ₹68,150

How Current Assets are shown in the Balance Sheet?