Current Assets: Definition, Types, Formulas, Components

Current assets are a category of assets on a company’s balance sheet. They are essential components of a company’s working capital and provide insight into its short-term liquidity and ability to meet its near-term obligations. On a balance sheet, current assets are typically listed in order of liquidity, reflecting how quickly they can be converted to cash. This provides insights into a company's financial health and operational efficiency. This blog will discuss current assets, their calculation, types, and other important aspects.

What Are Current Assets?

Definition: Current assets are the liquid assets available to a company at the end of the accounting year. They include cash and the company's assets and rights that can be converted into cash within the operating cycle. 

The operating cycle is the period between purchasing assets and obtaining cash. It generally lasts one year.

Content

• How to Calculate Current Assets
• Types of Current Assets
• What Elements Make Up Current Assets?
• What Is The Ideal Value For Current Assets?
• Examples of Current Assets

How to Calculate Current Assets 

The current assets formula is as follows – 

Current Assets = Cash + Cash Equivalents + Inventory + Accounts Receivables + Marketable Securities + Prepaid Expenses + Other Liquid Assets.

Types of Current Assets

Depending on the nature of the asset, there are below types of current assets – 

• Inventories: Store items are current assets since they are acquired to be sold and not to remain in the company. So are raw materials and products intended for consumption.
• Cash: The balance of a bank account is current assets since it is immediately available.
• Financial investments: Financial products (funds, deposits) are considered current assets if their maturity equals or exceeds one year. For example, a three-month fixed deposit is a current asset.
• Trade debtors: Invoices pending collection, letters, and promissory notes are current assets since they must be paid quickly.

What Elements Make Up Current Assets?

The main components of the current assets of a company are the following:

• Treasury: It comprises the liquid money in the company’s cash register and different bank accounts (current, savings, etc.).
• Stocks: They are goods intended for sale during the regular course of operation.
• Raw materials: Raw materials are goods intended for transformation and incorporation into the company’s production process.
• Debtors: These are the company’s credits against third parties, including commercial and non-commercial ones.
• Short-term financial investments: They include the financial products available to the company (funds, deposits, etc.), provided that their maturity is equal to or less than one year.
• Negotiable securities: These are included in current assets to be converted into cash within the operating cycle.

What is the Ideal Value for Current Assets?

Ideally, a company's current assets should always be greater than its current liabilities. Otherwise, the company could lack the necessary liquidity to fulfil its corporate purpose and satisfy its short-term debts, which could lead to insolvency. 

Therefore, current assets are a fundamental financial indicator of the company’s economic strength since they reflect the payment capacity available to meet its obligations.

Examples of Current Assets

Investments

Investments correspond to the company’s securities, shares, and quotas resources. Like CDTs, investments should be classified according to the time required to convert them into cash. Usually, all types of investments are classified as current assets, except for shares that some companies acquire intending to keep indefinitely, which leads them to become non-current assets.

Inventories 

Inventories by obligation must be current assets. Since a company cannot afford to buy merchandise to store for months or years, it would incur a high financial cost to have immobilized resources that do not generate any profitability.

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Commercial inventories

This excludes all merchandise acquired from other suppliers to resell directly later, so it does not require any additional transformation process.

Raw materials

Raw materials correspond to all the products, purchases, or resources available to the company to carry out an industrial transformation process in which it generates its final products.

Other supplies

This category includes merchandise and products used by the company to maintain its operations, including the following elements: various materials, fuels, materials manufactured by a third party to use in subsequent transformation processes, spare parts, packaging, office supplies, etc.

Work-in-Progress (WIP) 

These goods are being transformed at the end of the balance sheet but are not semi-finished products or waste.

Semi-finished products

As their name suggests, these products are manufactured by the company but still need to finish their respective production processes. Therefore, they can only be sold once they have completed their manufacturing process. 

Finished products

These products have completed their production process and are ready for sale.

By-products, waste, and recovered materials 

These products are those to which a particular sale value can be attributed, so they are also usually accounted for even though they already have a reduced sale value.

Treasury and Cash

The treasury is made up of all the liquid money that is at our disposal; that is, it is the cash that we can use immediately, which can be obtained through various instances, such as the following:

• Cash register
• Banks and various credit institutions.
• Short-term, highly liquid investments.

In the case of short-term investments, for them to meet this distinctive characteristic, they must be ordinary in the management of the business and easily accessible. They can be converted to cash in less than three months. And that it is a safe capital or, in other words, does not present risks that could severely modify the amount invested.

Customers

This includes all the debts contracted by customers in favour of the company. It includes the debts of the buyers of the goods and services a company offers. As well as commercial credits that are expected to be collected in the short term and are included in subaccounts present in the following cases:

• Client portfolio: This is the amount a company charges through the invoices and manages the collection of goods and services from customers. These charges will be paid when the final payment has been made.
• Factoring operations: Credits assigned through factoring are included here, provided that the company carries out the risks and benefits of the collection procedures.
• Associated companies: Constitutes the debts of those clients that belong to associated companies and groups, which, by belonging to the same product group, are clients of a different type.

Financial Accounts

They are short-term liquid assets. These include the cash that enters and leaves at all times as part of the productive and commercial activity. This corresponds to the rights and obligations of an economic nature the company can settle in less than one year. The categories of financial accounts are:

• Short-term financial investments in related parties
• Other short-term financial investments
• Other non-bank accounts

Conclusion

Time determines whether or not an asset is a current asset. Companies have different types of assets and rights that are likely to be converted into money. It is a current asset if its capacity to become liquid is effective in fewer than twelve months.

Current assets provide excellent security since, in short, they represent money that a company or an individual can use at any time to resolve a situation or meet a specific payment.

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