Current Assets Meaning and Examples
Current Assets Meaning – Those assets that are most easily converted into cash, including cash on hand, accounts receivable, and inventory.
It is one of the most important item and appears in the Balance Sheet of the company. Current Assets mainly includes Cash and cash equivalents, marketable securities, accounts receivables, inventory and prepaid expenses.
These are very important for the business as they are used to fund the day to day operations of the business. These are shown in the balance sheet in terms of their liquidity. Liquidity means how easier the assets gets convertible to cash. Assets which takes more than one year for conversion into cash are known as long term assets.
It is always important that these assets are not overvalued. Because these assets are used in current ratio formula as well as in working capital formula. Overvaluation of these assets leads the wrong interpretation of the financial performance of an organization.
Currents Assets of the company consists of the following:
Account Receivables – It is the money that outsiders owes to the company. They are part of the current assets till they are readily convertible into cash within 1 year. It is not necessary that firm receives the receivables in full. Sometimes either half or none of the money received. This is known as Bad debts. Sometimes to combat with such situation, firms also made provision for doubtful debts.
Prepaid Expenses – Though there is no feature of convertible into cash , but still are part of current assets. Because payment for these expenses are already made in advance. So the cash can be used in fulfilling other purposes. Examples are insurance, tax paid in advance, etc.
Inventory – To be very honest, inventory is not as liquid as other current assets. There is always possibility that inventory can be sold or not sold. In peak season, inventories gets cleared. However in lean seasons it is quite difficult to clear off the inventory. In addition to this, demand for the products also results in fluctuations in the inventory.
Example of Current Assets
Let’s understand current assets meaning more clearly with an example. Examples of current assets are – Marketable securities, short term investments, debtors, prepaid expenses, prepaid expenses and accounts receivables.
