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