July 5, 2020


Accounting + Finance Blog

Meaning of Current assets and key Explanations

Meaning of Current assets and key Explanations

Assets are the properties or wealth of a business. A business maintains a set of assets that are usually classified into current and noncurrent (long term) assets. This article focuses on current assets, its definition, and key points to note.

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What are the current assets?

It is a class of assets that include cash and any other assets that are readily converted into cash within an operating cycle or the entity’s financial year.

Key Explanations

It is a class of assets. There are other classes of assets. Current assets are one of them. Assets can further be classified as noncurrent assets, physical assets, investment assets, fixed assets, and so on. However, for the sake of financial reporting, assets are classified as current and noncurrent.

It is cash. And rightly true. The main part of the current assets is cash. Every other type of current asset converted to cash within a year. It is Cash the firm will use to pay salary and meet every other business obligation including repayment of the loan.

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It is an asset that is readily convertible to cash. Aside from cash any other items of a business that are readily convertible to cash are regarded as current-assets. For example, inventory or stocks may be converted to cash. Inventory Is converted to cash when the items of inventory are sold for cash. If the inventory is sold on credit, it becomes account receivables (debtors) which can as well be converted to cash when the customer makes payment promptly.

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Convertible current assets must fall within an entity’s operating cycle or financial year. To be classified as one, such items or events must fall within the business operating cycle or financial year whichever is longer.

A business operating cycle is the period of time in which an inventory is converted to cash. Generally, in a trading firm, inventory is purchased on cash or credit bases. When an inventory is sold it becomes cash if the sales are on cash. Or Account Receivables if the sales are on credit. Next, it depends on how long the entity will recover its money from customers who buy on credit.

Trading businesses usually have less than one year of operating period or cycle. However, manufacturing firms have a longer operating cycle. This is so as the inventory will include raw materials, work in progress, and finished goods.

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If the operating cycle is longer than the financial year (that is, one year) the item or events will be classified under current-assets.

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The categories of Current assets are

1. Inventory and supplies
2. Account receivables
3. Marketable securities (short term investments)
Prepared expenses
4. Accrued income (accrued income is added to account receivables)
5. Cash and cash equivalent ( cash equivalent includes current and savings account in the banks, fixed deposits, treasury bills).

Current assets are presented in a statement of financial position. For banks, these assets are usually presented at the top line item starting with cash and cash equivalent.

For non-banks, it is presented below noncurrent assets and it usually begins with inventory with cash and cash equivalent at the bottom of the current-assets categories in the financial position statement.

Finally, current assets are items in a statement of financial position that are available within the next year or an operating cycle of an entity. Such assets include cash and non-cash items that are readily convertible to cash.

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