Current assets can be quickly transformed into cash or used in the normal operation period for your business or within a single year. The term "operating cycle" is the period it takes to purchase or create inventory, sell the completed items and then collect cash to pay for it.
However, the operating cycle of a business typically covers a single year. However, some businesses operate that extend beyond one year. For example, liquor companies use their inventories as assets in use.
This is even though these inventories are part of the process of aging for longer than two years. Let's check the current assets definition, examples and everything important.
Did you know?
Key characteristics of the current asset are their fast conversion into other assets, short-lived existence, quick and recurring decisions, and, lastly, interlinked. Virtually managing current assets is as good as managing working capital, and the term current asset is a blend of current and asset.
Also Read: The Asset Reconstruction Industry in India
What Are Current Assets and Current Liabilities?
Current assets can be converted into cash within a year, whereas current liabilities are obligations that are expected to be paid within a year. Cash, inventories, and accounts receivable are examples of current assets. Accounts payable, wages payable, and the present component of any planned interest or principal payments are examples of current liabilities.
What Are Some Current Assets Examples in the Present?
You can also divide your assets in the present into two groups:
- Liquid
- More liquid
Your company can turn liquid assets in the current market into cash from 90 days to a year. Examples include:
- Inventory
- Prepaid expenses
- Accounts payable (more than 90 days)
- Investments for a short-term duration
Assets that can be converted into cash within a shorter than 90 days are referred to as more liquid current assets. Examples include:
- Balances of cash and cash
- Bank deposits
- Accounts open (within 30 days)
One of the most valuable assets of your company is cash in the bank, and it's closely followed by money that you can take out of your company's bank account.
What Are Current Assets, and How Do You Manage Your Assets?
Asset management involves keeping track of, monitoring and managing the assets to simplify your processes and generate maximum profits from their disposal or sale.
Managing your non-current and ongoing assets, like equipment, vehicles, vehicles, inventory and investments, will ensure that you can manage your assets. It also helps you recognise and manage all the risks associated with them to protect the value of your assets.
Here are some of the reasons why businesses should be taking an active part in the management of their non-current and existing assets:
Your account will be able to hold all your assets.
Implementing asset management makes it simpler for companies to track their non-current and current assets. It allows you to understand:
- Where your assets are located
- The way they are used
- What changes were made to them
- The changes they need to safeguard the value of your assets
- Enable the process of liquidating them easier.
Recognising and Managing the Risks
Recognising and managing risks due to the ownership and usage of the assets you own is a crucial element of asset management. Understanding the risks you face helps safeguard the worth of your assets and overcome the obstacles that may arise. Does calculating your employees' salary become hard and consume a lot of time? The solution is simple, use a salary calculator.
Increase the Precision of Your Financial Statements
Monitoring, tracking and maintaining your assets can better understand their worth, and it can also help you keep track of amortisation and depreciation rates with accuracy within your accounting statements.
Eliminate Ghost Assets from Your Inventory
After knowing about the current assets definition, it's easy to keep track of damaged, lost or stolen assets in your company's financial records. Implementing an asset management program in place will give you an accurate understanding of the worth of your assets at all times. Also, it will help you make better-informed choices.
Current Assets Against Current Liabilities
Current liabilities are types of debt that a company must pay or settle in the next 12 months. Also, current assets in a business are useful to pay these debts. Working capital is the distinction between a current asset and a current liability, and it is the term used to describe the operating liquidity available to the business.
Positive working capital ensures that a firm can sustain its operations and has sufficient cash reserves to pay for short-term debts and other future costs. This is not to be confused with the above terms. A fixed asset is an asset that isn't consumable or sold like the land, buildings, vehicles, machinery, equipment and leasehold improvements.
Increase Loss Prevention
Asset management is a method of tracking and identifying items stolen by employees or customers. Large, non-current assets such as machinery and vehicles are hard to steal, and tools and other assets such as inventory and cash are easy to steal. Asset management lets you identify when things disappear and avoid loss from happening in the first place.
Current Assets in the Book of Accounts
In the case of recording current assets in the balance sheet, they're usually classified according to their degree of liquidity. This means that you can easily convert them into cash, and the higher the balance sheet will be.
Current or Long-Term Assets?
The majority of accounts receivables can be paid back within a year. If the amount due for an invoice appears like it isn't going to be in that category, it shouldn't be considered a current asset but rather an asset for the long term.
Other long-term assets include intellectual property, such as copies of copyrights, patents, equipment or equipment used in your company, etc.
Liquidity and Current Assets
Current assets are also described as "liquid assets." A quick measure of your financial health can be determined by what's known as the "liquidity ratio". It determines if you have enough funds to pay your short-term obligations, and we determine it by dividing your current assets by the total amount of current obligations.
The result will show the number of instances your current liabilities have coverage. If the ratio is greater than 1.00, then they have protection. This ratio can be significant to creditors, for example, those who view the ratio as a measure of your business's ability to meet deadlines or obligations in the short term.
Also Read: What Is Goodwill in Accounting?
How Else Can Assets Be Evaluated?
Knowing how to determine your current assets and current liabilities can help you comprehend the financial situation of your business. But, they do not give a complete picture of your company's performance. Instead, lenders and investors examine your business based on your existing assets and liabilities, using some additional formulas. The use of these formulas carries complications.
The accounting services use these formulas to assess how your current assets and liabilities compare.
Quick Ratio Formula
On a balance sheet, the assets are ranked as per their liquidity. It is cash that already exists, so it is more liquid. So, the formula for quick ratio is like the formula used today. However, it only focuses on the most liquid assets. Thus, inventory and prepayment expenses will be excluded to determine the number of assets a company can use to pay off debts quickly. The quick ratio formula is according to:
Rapid Ratio = (Current Assets including Prepaid Expenses and Inventory)/current liabilities.
Current Ratio Formula
The formula for calculating the current ratio tests the financial strength of your business by calculating how much cash in assets can you transform into cash to settle debts within a time frame of one year. Each industry is distinct and has different methods of cash conversion and economic methods. For most companies, having a ratio of 1.5 is considered acceptable.
If a company's ratio is lower than 1, it indicates they're operating with negative working capital and might have a loss of money. Ratios above 2 indicate that the company is wasting money that isn't being put into the investment. The formula for calculating ratios currently works like this:
Current Ratio = Current Assets/Current Liabilities
Network Capital Formula
The formula for networking capital will determine the shareholder's equity and determine whether there are enough assets to cover all bills, debts and other obligations due in one year. The formula for net working capital can be described like this:
Net Working Capital = Current Assets - Current Liabilities
Conclusion
Knowing how to calculate the current assets using the formula for existing assets allows you to understand your business's financial health. It will also assist you in funding daily business operations, paying operating expenses and addressing your current debts and liabilities.
Using analytics to help your business, like calculating the ratios of your business and understanding its customers base, will give you a bright picture of different areas of your company. You'll know how to keep track of progress and where to find outside financing. Also, be sure to eliminate the daunting tasks of calculating the transactions of your business every time by using Khatabook.
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