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What are current assets? | Current assets examples | Current assets formulas |
Small business owners are expected to do it all. That includes accounting, which is a complicated topic in its own right. But as a small business owner, understanding basic accounting terms can help. A common accounting term you may come across is “current assets.” Let’s explore what that term means, some examples, and how to calculate them.
Current assets are the business assets that you expect to convert to cash within a—typically, one-year—operating cycle. Your current assets can be existing cash, the inventory you plan to sell, supplies you need for a service, your investments, or other cash equivalents.
Typically, businesses calculate their operating cycles yearly. However, some businesses will have extended operating cycles that exceed a year. Either way, your current assets will still be determined by what you can turn into cash during that cycle.
Understanding your current business assets can help you better understand your operating expenses. You report your current assets as a dollar value of all assets, including assets that you haven’t converted to cash. This report helps you determine the money available to your business, also known as liquid assets. Knowing your current assets can help when filing taxes, purchasing business insurance, declaring bankruptcy, and more.
Noncurrent assets are any long-term assets that won’t develop into cash within a year or the business’s operating cycle. Noncurrent assets might include patents, equipment, real estate, and cash surrendered from canceling insurance (cash surrender value). Noncurrent assets are “illiquid,” meaning you cannot turn them into cash easily.
Cash is your most liquid asset. As the term implies, cash assets include any cash on hand. Cash assets include
Typically, cash equivalents are mostly liquid. Business owners may store cash equivalents in a bank or other interest-earning financial institution, such as a stock fund. Cash equivalents can include
Inventory assets are any assets you intend to sell to your customers and the materials you need to create those goods. Inventory may include
But determining the cost of inventory is more than the item’s sticker price. You also have to calculate how much it costs your business to have that item in stock. Costs may include shipping, supplier charges, storage costs, and other associated costs.
Your accounts receivables include any money customers owe your business. Accounts receivable include purchases made on credit and projects you’ve completed that a customer has yet to pay for in full. The most important distinction about your accounts receivable is that they must be paid within your business’s operating cycle to qualify as current assets.
Prepaid expenses include any payments made to the business from other companies for future goods or services. Prepaid expenses count as current assets as long as the benefit or use of the prepaid item has not expired. They must also be within your business’s operating cycle. Prepaid expenses include
Temporary investments are any company investments that you may liquidate within a business’s operating cycle. These investments are also called “marketable securities.” The most common examples are government bonds or stocks. Because these assets are tied into the stock market, their value can fluctuate. When calculating your temporary investments, record their value as their current market value.
The last type of asset is any current asset your business owns that you can liquidate within the business’s operating cycle. These assets can include tax-deductible expenses or pre-tax income gains.
Typically, businesses will list their current assets on a balance sheet , in descending order of liquidity. Items that have a higher chance of converting to cash will rank higher on the balance sheet. Items that may take longer or are less likely to turn into cash will be at the bottom.
Once you have your current assets listed out, you can add them together to determine the total amount of current assets. There are also other financial formulas you can use to determine the health of your business and assets. Here are three other common financial formulas that use current assets.
Your current ratio evaluates your company’s ability to meet any short- and long-term obligations. The ratio, also known as “working capital,” compares your total current assets to your current liabilities. Current liabilities are any financial obligations a company has that will be due within an operating cycle.
A current ratio lower than the industry average suggests the company is at a higher risk of default. They will be unable to balance what they owe with what they own. Meanwhile, companies whose current ratio is too high above the industry standard suggests they aren’t using their assets efficiently. Companies should aim to have a current ratio that is average or slightly above average. The current ratio formula includes
Current assets / current liabilities = current ratio
Use your quick ratio to determine your company’s short-term solvency. Calculate this by determining which of your current assets are the most liquid. Then use that to meet your short-term obligations. Typically, your quick ratio does not include assets such as inventory. The quick ratio formula includes:
(Cash + cash equivalents + temporary investments + accounts receivable) / current liabilities = quick ratio
Your cash ratio measures your business’s total cash and cash equivalents, in relation to your current short-term liabilities. This ratio determines a company’s ability to meet its short-term debt obligations using its most liquid assets. The cash ratio formula includes
(Cash + cash equivalents) / current liabilities = cash ratio
Accounting is a tough subject, but knowing the basic terms can help you build a solid foundation for your business. Many small business owners choose to take this challenge head-on. But accountants, bookkeepers, and financial tools can help you manage your business finances even more. Whether you run your books yourself or get help from financial professionals, having a financially savvy foundation is always good for business.
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