Monday, October 24, 2016

What are Current Assets?


The current means present, immediate, recent and so forth. Therefore, current assets are those assets that are meant and expected, to be converted into cash in an operating cycle quickly or immediately. In the accounting parlance one year is the accepted time period. Therefore all the assets that are expected, to be converted into cash within a year are called current assets.

On the other hand assets that are meant to be held for a long period or for period exceeding one year are called fixed assets or non-current assets.

Examples of current assets:

  1. Cash and bank balances
  2. Trade receivables also called sundry debtors
  3. Inventories or stocks of raw materials, semi-finished and finished goods, consumables, spare parts, etc.
  4. Temporary loans and advances that will either be returned or charged to expenses within a year, etc.

Examples of Current Assets
Examples of Various Current Assets

Importance/ Significance:

Holding adequate current assets in various forms is both inevitable as well as mandatory for the smooth and uninterrupted operations. Additionally, holding adequate current assets is vital for the liquidity of the organization, meaning ability to make timely payments to suppliers and meeting expenses. Employing adequate current assets thereby improves the current ratio - another important financial indicator.

Having emphasized the need for adequate current assets for the short term health of the company, excess current assets is not a good sign, indicating inefficiency of the operations.