Current Assets Definition
Current Assets make up part of the Balance Sheet in the business accounting report.
They are items that are either actual money or can be converted into cash quickly, usually within one year. They include bank account, savings account, stock, work in progress, prepayments, debtors and petty cash. We will look at each category further.
Current Assets in the balance sheet usually are organised based on the level of liquidity. It means that an asset that you can convert the quickest into cash. It would typically be cash and the bank.
Current Assets Examples
It is balance in the business bank account for general transactions; if there is more than one account, they will all be listed
List of all short-term savings accounts that the business owns, it might be that there is more than one account.
Is used to purchase sundry items. Full details on petty cash procedures and a free Excel template are available.
Insurance is an example of a prepayment. Example – a business purchases an insurance policy for a year in February. The financial year runs from 1st April – 30th March, so only two months are entered in the profit and loss account as an expense, the remaining ten months are posted to the prepayments account.
When sales are made to a customer on credit, the balance is posted to the debtor’s account. If a customer pays an invoice, the money will be posted to the bank balance, and the debtor’s account will reduce. A debtors report is a useful tool when chasing up outstanding money from customers, as it will show a list of invoices and when they are due for payment.
Items purchased to be sold or used by the company. There are several different ways to value stock, which is discussed further in the stock section. If a company owns lots of stock, then a stocktake will be required to count the inventory to ensure the correct figure is in the accounts.
Work in Progress
Items that production has started on but as yet are not completely ready for sale. The figure will include labour costs and any materials used. An example of work in progress is a manufacturing company that produces furniture is partway through making a dining table. At the period end, only the wood has been cut to size but not constructed. In the accounts, the figure will include the cost of wood and labour to cut it to size.
How to Calculate Current Assets
If you are using an accounting software package, the current assets will be calculated for you when you post your transactions and viewed by running a Balance Sheet report. If you prepare the accounts manually, then you will need to calculate each of the figures and add them up.
Current Assets Formula
An example to calculate the Current asset is Bank balance + Savings + Petty Cash + Prepayments + Debtors + Stock = Current Assets
An example of current assets will look like this in the balance sheet:
|Work in Progress||75.64|
|Total Current Assets||5062.73|
The current ratio will show how solvent a business is in the short term (one year). The ratio is used by banks and other financial lenders to work out if the company has enough cash on hand to pay off debts. The ratio is:
Current Assets divided by current liabilities = Current ratio
An example is that the current assets are 5000 and liabilities 2500, the ratio is therefore 2:1. If you have a current ratio of 1:1 it means that the business is insolvent.
Further reading available at Accounting Coach.