Current assets are assets that a company holds and can be easily sold or consumed and further lead to the conversion of liquid cash. For a company, a current asset is an important factor as it gives them a space to use the money on a day-to-day basis and clear the current business expenses. In other words, the meaning of current-asset can be explained as an asset that is expected to last only for a year or less is considered as a current asset.
Current Asset Formula
For a company, the current asset in the balance sheet can be calculated as follows.
Current asset=Cash+Cash Equivalents+Inventory+Accounts Receivable+Market Securities+Prepaid Expenses+Other Liquid Asset.
Use of Current Asset
- They can be used as clear regular payments and bills.
- It gives an insight into the company’s cash and liquid position
- Investors and Creditors analyze the company’s current assets closely to understand the risk or benefits involved in the operation.
Examples of Current Assets
- Cash and equivalents
- Short-term investments (marketable securities)
- Accounts receivable
- Prepaid expenses
- Any other liquid asset.
Total Current Assets
A total current asset is the aggregate of all cash, prepaid expenses, receivables, and inventory on the company’s balance sheet.
Some other formulas that are based on the total current asset formula are represented below:
- Current Ratio = Current-Asset ÷ Current Liabilities
- Quick Ratio = (Current-Asset – Inventory + Prepaid Expenses) ÷ Current Liabilities
- Net Working Capital = Current Asset – Current Liabilities
- Average Current Asset = (Aggregate Asset for Current Year + Aggregate Asset for Preceding Year) ÷ 2