Current assets are the assets that can be converted into cash or consumed within a one year. They are also known as short-term assets or liquid assets. They appear on the top of the company’s balance sheet. They are important to business because they can be used to fund day to day business operations. They are key indicator of business liquidity. The current assets are useful when evaluating the financial position of a company.
What are Current Assets Types and Examples?
Following are some of the current assets that are generally found in the current assets section of company’s balance sheet. They play a vital role in managing cash flow of business. When they are reported on the balance sheet, they are generally organized based on their level of liquidity. This means that the more easily they can be converted into cash, the higher up on the balance sheet they are appeared.
2. Cash equivalents
3. Account receivable
5. Marketable securities
6. Prepaid expenses
From an accounting perspective, cash is the most liquid asset of any business. The cash balance is shown under the current assets on the balance of the company. The cash is appears on the top of the current assets because it is listed in order of liquidity. It is increased on the debit side and decreased on the credit side. The cash is used to meet its day to day business expenses. It usually includes currencies, deposited fund at bank and un-deposited cheques. The cash flow statement is made within in a company in order to know the outflow and inflow of cash. The cash come from sale of goods and services. It may also come from investors, personal funds from owners or can be loaned from a bank or any other organization.
Cash equivalents are short-term investments that can be converted into cash usually within 90 days. They are highly liquid. This means that they are easily sold in the market. The buyers of these investments are easily available. The cash equivalent must also have an insignificant risk of change in value. Equity shares cannot be classified as cash equivalents because the equity shares value changes. Examples of cash equivalents include commercial paper, treasury bills, and other investments that mature within 3 months.
Account receivable is the payment which the firm will receive from its customers who have purchased goods or services on credit. When the credit transaction is made, the account receivable is debited with the customer name and the sale is credit. When a cash payment is received from a customer, the cash is debited and the account receivable is credited with the same customer name. The account receivable is categorized as a current asset because sales made on credit are expected to get paid soon as per the credit terms which maybe 10, 30, 60 or 90 days.
Inventory refers to stock of goods. There are three types of inventories, including raw material, work in process and finished goods. The raw material is used in the manufacturing process to produce desired goods. The work in process refers to those inventories that are partially completed. While the finished goods are completed goods or ready for sale. These three types of inventories are maintain and reports by manufacturing business. The merchandising business has only one inventory which is ‘Merchandise Inventory’. While the service business has no inventory. The inventory is reported as a current asset on the company’s balance sheet. It is necessary to track inventories in order to make wise decisions for purchasing.
Marketable securities are financial instruments that can be bought or sold on public exchanges easily. They have maturity date of one year or less. Because of short maturity period, some investors are more eager to grab this type of investment. They are temporary investments one firm might make in another large firm with the hope of providing higher returns to its shareholders. Common examples of marketable securities are common or preferred stocks, bonds and treasury bills. The marketable securities have effective lowering risk. They are means for a company to have ready access to cash when required. They are reported as current asset on company’s balance sheet.
Prepaid expenses are operating costs of a business that have been paid in advance. They are reported as current asset on the balance sheet. The common examples of prepaid expenses are prepaid rent and prepaid insurance. Generally, the amount of prepaid expense is used up within a one year. As the prepaid amount used up, the prepaid expense (current asset) is reduced and the amount of the reduction is reported as an expense on the company’s income statement. When the prepaid expense is occurred, for example, prepaid rent, the prepaid rent is debited and the cash is credited. As the prepaid amount expires, the rent expense is debited and the prepaid rent is credited with the same amount.