What are current assets? Definition and meaning
Current assets are things that a company owns and could be turned into cash easily (within 12 months or within their operating cycle), as well as money it is owed.
Examples include cash & cash equivalents, short-term investments, accounts receivable, inventories, prepaid expenses (bills paid in advance), and raw materials.
Current assets may be referred to as current accounts in the United Kingdom.
On a business’ balance sheets, assets are generally classified into either current or non-current (long-term) assets. Current assets are usually presented in the balance sheet in order of liquidity, i.e. the most liquid items appear first.
“Money that a business has or is owed, or something that could easily be turned into money, for example raw materials and goods that have been produced but not sold. Assets that can be converted into cash relatively quickly, usually within a year.”
Companies whose current assets are greater than their current liabilities are more likely to be able to pay their bills and meet their debt obligations.
Getting current ratio from current assets
If you divide a firm’s current assets by its total current liabilities you get its current ratio; a measure commonly used as an indicator of the business’ liquidity and ability to meet short-term obligations.
Creditors want to know what their debtors’ current ratio is. Companies that have significantly more current assets than liabilities are seen as a good risk regarding trade credit.
When trying to determine how liquid a company is, you should look carefully at what their accountants have classed as current assets; often items that are not so liquid are included. Within the accounts receivable entries there may be some extremely overdue invoices.