WHAT EXACTLY ARE Current Assets?

What are Current Assets? Definition: A current asset, also known as current accounts, is either cash or a resource that are expected to be converted into cash within twelve months. These resources are often known as liquid assets because they are so easily converted into cash in a brief period of time. Take inventory for example. Inventory can be sold for cash in the next 12 months easily. Contrast that with a piece of equipment that is much more difficult to sell. Also, the inventory is likely to be bought from the normal span of business for retailers.

Equipment, on the other hands, are not. This concept is extremely important to management in the daily operations of a business. As monthly bills and loans become due, management must convert current resources into cash to pay its commitments enough. Management isn’t the only one interested in this category of assets, however.

Investors and creditors use several different liquidity ratios to investigate the liquidity of the company before they spend money on or provide to it. Investors want to know that their invest will continue to grow and the business will be able to pay returns in the foreseeable future. Creditors, on the other hands, simply wish to know that their basic principle will be repaid with interest. Let’s take a look at a few types of current assets.

What is roofed in Current Assets? There are many assets that can be one of them category, but I shall only discuss the most common ones. Cash – Cash is all coin and money of an ongoing company possesses. This includes every one of the money in a company’s bank-account, cash registers, petty cash drawer, and some other depository. This can include foreign or home currencies, but investments aren’t included. Cash Equivalents – Cash equivalents are investments that are so carefully related to cash and so easily changed into cash, they may as well be money. A good example of an equivalent is a US Treasury Bill.

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  • It is also exempt from taxability
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  • Revenues from external customers

T-bills can be exchanged for cash at any point without risk of shedding their value. Accounts Receivable – Accounts receivable is actually a short-term loan to vendors and customers who purchase goods on accounts. Typically, customers can purchase goods and purchase them in 30 to 90 days. Accounts receivable keeps track of these loans. Inventory – Inventory is the merchandise that an ongoing company purchases or makes to sell to customers for an income. This could be anything from pencils to cars to houses.

It depends upon the business. For instance, a motor-car dealership is in the business of reselling vehicles. Thus, their cars are believed inventory, even though they have plenty of pencils in their offices. Prepaid Expenses – Prepaid expenses are exactly what they sound like-expenses which have been paid before they were consumed.

Insurance is a good example. A six-month insurance policy is usually paid for up front, even though the insurance isn’t used for another six months. Even though this property won’t actually be changed into cash, they will be consumed in today’s period. Investments – Investments that are short-term in nature and expected to be sold in today’s period are also included in this category.