Think about a glass of water and a tray of ice cubes. The water is fluid, ready to flow at a moment's notice. The ice cubes, while still water, are frozen and will take time to melt.
For businesses, current assets are like the glass of water. They are ready to move and can be used to pay for the business's immediate needs. Non-current assets are more like ice cubes: it takes time to access their value.
Let’s dive into the meaning of current or “liquid” assets and their role in keeping a company's finances flowing smoothly.
What are current assets?
A current asset, also known as a liquid asset, is any resource a company could use, turn into cash, or sell within a year. This includes cash in the bank, money that customers owe (accounts receivable), goods ready to be sold (inventory), and other investments that can be easily offloaded. Current assets are a company's quick cash reserve, ready to cover short-term bills or expenses.
What are non-current assets?
In contrast, non-current assets are resources with a longer life span, usually more than a year. They cannot be easily converted into cash within a short timeframe. Non-current assets include property, manufacturing equipment, long-term investments, and patents and trademarks.
It's important to know the difference between types of assets because it affects how they're shown on a balance sheet. A balance sheet is a snapshot of a company's financial health at a particular moment. It has three main parts: assets, liabilities, and equity.
On a balance sheet, assets are listed in order of how quickly they can be turned into cash, also known as asset liquidity. Current assets, being the quickest to convert into cash, are listed first. So, if a company needs to pay bills or make immediate investments, it's the current assets they'll look to. That's why keeping a healthy amount of current assets helps a business run smoothly.
7 types of current assets
While cash is the most obvious current asset, it’s not the only one. Here are the seven main types of current assets, listed in order of liquidity (which is how they should be listed on a balance sheet):
- Cash and cash equivalents
- Marketable securities
- Accounts receivable
- Inventory
- Supplies
- Prepaid expenses
- Other liquid assets
1. Cash and cash equivalents
Cash is simple: It’s how much money you have in the bank. Cash equivalents, meanwhile, are things that can easily be converted into cash, like short-term savings bonds, short-term investments, and foreign currency.
2. Marketable securities
Marketable securities are investments that can be readily converted into cash and traded on public exchanges. This applies to cryptocurrency, for example, and other more standard marketable securities and short-term investments that are easy to sell.
3. Accounts receivable
Any of your business’s outstanding debts or IOUs are considered accounts receivable. It’s the money that clients or customers still owe you for services already rendered or goods already delivered.
4. Inventory
Inventory covers the products you sell and is listed on your balance sheet as finished goods, works-in-progress, raw materials, and supplies.
However, not all inventory counts as a current asset; any inventory you think you’ll be holding onto for more than a year should be considered a non-current asset and listed as such.
5. Supplies
Supplies are tricky because they’re only considered current assets until they’re used, at which point they become an expense. If your company has a stock of unused supplies, list them under current assets on your balance sheet.
6. Prepaid expenses
Prepaid expenses include anything you’ve paid for but expect to benefit from over time. If you’ve paid for a year-long lease or an extended insurance policy, you have prepaid expenses. Report these on your company’s income statement over the period the payment covers.
7. Other liquid assets
This is the catchall category. If you have any other current assets that can easily be converted into cash within a year (like promissory notes or tax refunds, for example) that do not fit into any of the above categories, list them here.
Examples of current assets
- Physical cash and cash in checking or savings accounts
- Money market funds (Cash Equivalents)
- Treasury bills and short-term government bonds (Short-Term Investments)
- Unpaid customer invoices (Accounts Receivable)
- Raw materials, work-in-progress goods, and finished goods (Inventory)
- Prepaid rent, insurance, and taxes (Prepaid Expenses)
- Stocks or bonds (Marketable Securities)
- Written promises to receive money, typically with interest, at specified dates (Notes Receivable)
- Office supplies or maintenance supplies (Supplies)
- Other liquid assets that can be quickly converted into cash without losing their value
How to calculate current assets
Once you’ve listed your current assets on your balance sheet in the order outlined above, it’s easy to calculate your total current assets—just add them all up. Here’s the formula:
Current Assets = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Supplies + Prepaid Expenses + Other Liquid Assets
Another way current assets can be used on your balance sheet is for calculating liquidity ratios. By showing you the balance of assets to liabilities, liquidity ratios give you a sense of your company’s financial health and help you understand whether it can meet its short-term financial obligations. Here are some common types of liquidity ratios.
Current ratio
Your current ratio is the ratio of current assets to current liabilities, which are debts you must pay off within the year. Luckily, this calculation doesn’t require advanced math. The formula for obtaining your current ratio is:
Current Ratio = Current Assets / Current Liabilities
Quick ratio
Your quick ratio helps you understand how well your company can meet its financial obligations in an even shorter term. Instead of looking at your total current assets, a quick ratio only considers assets that can be converted to cash within 90 days. Here’s the formula for obtaining your quick ratio:
Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / (Short-term Debt + Accounts Payable + Accrued Liabilities and Other Debts)
Net working capital
Calculating net working capital gives you a clear view of your company’s liquidity, short-term financial health, and efficiency by showing you how much money you could have right now. It’s a meaningful calculation and an easy one. The formula for net working capital is:
Net Working Capital = Current Assets - Current Liabilities
Current assets FAQ
What are some examples of current assets?
Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.
What’s the difference between current and non-current assets?
Current assets are short-term resourcesthat can be used or converted to cash within one year or one operating cycle, whichever is longer. Non-current assets are long-term assets that a company expects to use for more than one year or operating cycle.
Is cash a current asset?
Yes, cash is a current asset, as are “cash equivalents” or things that can quickly be converted into cash, like short-term bonds and investments and foreign currency.
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