Understanding current assets

Any business, no matter how big or small, is ultimately only the sum of its total assets. But not all assets can be considered current assets. For example, employees, equipment and real estate might all be company assets, but they are not current assets. So, what is a current asset, what is a non-current asset and why should you care?

What is a current asset?

Any asset that is expected to be used, sold or converted into cash in any way within one operating year can be considered a current asset. This means any cash or cash equivalents, temporary investments, inventory and stock, supplies and all other liquid assets are current assets. They are, in essence, the short-term assets that are used to fund daily operations and keep the wheels of the business spinning.

What is a non-current asset?

A non-current asset is also known as a fixed asset and refers to any assets that are intended for long-term use (longer than a year) and are not easy to liquidate. They commonly appear on balance sheets as “property, plant and equipment” (PP&E) and are subject to depreciation to account for the loss in value as they are used. So equipment, furniture, buildings and vehicles can all be considered non-current or fixed assets.

What is an intangible asset?

Any asset that isn’t a current or fixed asset is likely to be classed as intangible. As the name suggests, these are non-physical assets such as copyrights and patents that provide value to the business, but have no physical component and can’t quickly be converted into cash.

Not only can current assets be used to fund daily operations but they can also be considered as your company’s liquid assets due to how quickly and easily they can be converted into cash. If you’re doing this, however, you should separate fast-moving consumer goods from the assets that might be more difficult to sell.

When it comes to management, the total current assets is an important metric for any business, as it represents the liquid state of the company at any one moment in time. Potential investors will often keep a keen eye on current assets for this reason, as it will help them determine how risky an investment in your business might be.

Examples of current asset 

Cash is comfortably the most obvious and flexible current asset and behind cash are any kind of liquid investments. But there are plenty of other assets that can be considered current.

Stock and inventory 

As stock and inventory are used in daily business activities and are generally purchased with the intention of being sold or consumed within a current accounting period, they can be considered current assets.

Prepaid expenses

Although prepaid expenses can’t be converted directly into cash, they are typically reported on a balance sheet as current assets. This is because they have been paid in advance, so the business benefits that are to be felt as a result of that expenditure are unlikely to expire within the accounting period.

Accounts receivable 

Any money due to a business for services or goods that have been delivered is considered a current asset as it is generally expected to be delivered within the accounting period. Of course, if you are offering long-term credit to your customers then that might not necessarily be true but more often than not, accounts receivable qualifies as a current asset.

We can help

If you’re interested in finding out more about current assets, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.