What is a current asset?

Kent Gigger
December 3 2022

Asset tracking is the process of accounting for physical assets using a tracking and barcoding system. This allows for a business to better record their inventory and understand what products they have available. How a business decides to handle its tracking may vary — whether it’s using a sheet of paper or a robust software solution.

There are several types of assets that a company may have, but it is important that they are aware of their current assets. A current asset is an asset such as cash, raw materials, parts that they have on hand, or products that are in the process of being made, that a company must use or sell during that same year.

Current assets vs. current liabilities

A current liability is a debt that a company needs to pay, or settle with cash, within 12 months. Current assets within a business are often used to help settle these liabilities. The difference between a current asset and current liability is known as working capital, representing operational liquidity available to a business. Positive working capital is needed to ensure that a company is able to maintain its business and has adequate funds to satisfy short-term debts and future expenses.

Not to be confused with the terms above, a fixed asset is an asset that is not consumed or sold such as land, buildings, equipment, machinery, vehicles, and leasehold improvements.

Examples of current assets

Now that the term current asset has been defined, here are a couple of asset examples.

Accounts receivable

Accounts receivable represent the amounts in a company’s accounts that show money owed to the company by its customers, and in which they are expected to collect within a year. This type of current asset exists when a business’s customers purchase their goods or services using a line of credit. As long as the credit period is less than one year, it is considered a current asset.

However, this is not to be confused with accounts payable. This is when a company owes money, whether it be to their creditors, suppliers, etc..

Cash and cash equivalents

Cash — or cash equivalents that are to be turned into cash within the year — are typically reported on a company’s balance sheet as the first current asset. Examples of cash can include, but aren’t limited to:

  • Bills
  • Checks received, not yet deposited
  • Currency notes
  • Coins
  • Petty cash

Cash equivalents, on the other hand, are:

  • Money in bank accounts
  • Money market accounts
  • Short-term investments with a maturity of 90 days or less

Prepaid expenses

A prepaid expense is a future expense that is paid for in full prior to actually receiving the good or service. They are reported on the current assets sheets until the payment is due. Prepaid expenses are short-term assets, because the payment due-date is usually due within a few months of being recorded. Some examples of prepaid expenses are:

  • Prepaying rent for commercial space
  • Insurance policies
  • Equipment paid for before use
  • Salaries
  • Taxes
  • Some utility bills

Stock and inventory

Inventory and stock are valuable assets for any company. However, both terms are used interchangeably, despite differences between them. Inventory includes raw materials, goods in production, and finished goods that are all considered to be part of a company’s assets. This is because they will be ready for sale, or will otherwise generate revenue for the company.

Stock refers to those products ready to be delivered to the customers. Accountants often use the word inventory to discuss goods for sale, but even those businesses that don’t have stock to sell might still have inventories to maintain. The inventory of a retailer exists in shops where it is accessible to customers, yet the inventory of wholesalers and distributors exits in warehouses.

Another point of difference is that inventory includes stock and other assets, such as plant facilities and machinery. On the other hand, stock pertains to goods only whether it is in the form of raw materials or finished goods. Ideally, the stock should be sold within a year of being made, to prevent too much overstock.

Inventory is an accounting term that refers to products that are in different stages of production for sale, including finished goods that are ready to be sold, products that are still being made, and raw materials that are used in the production process.

Inventory is generally seen as one of the largest current assets that a company has, since it is converted into cash once sold.

Having an asset tracking solution is convenient for business owners. It gives them all the tools they need to better manage their business and keep track of their inventory and stock.

Using an inventory management solution that integrates with QuickBooks can help a business to account for and calculate all of the above current assets with more precision and accuracy.

How to calculate current assets

It is possible to calculate current assets on our own, given you have the proper knowledge, patience, and tools.

Current assets formula

The current assets formula is the total amount of cash on hand, combined with other assets that are converted to cash within one year. Written out, the formula looks like this:

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

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