Current asset definition
/What is a Current Asset?
A current asset is an item on an entity's balance sheet that is either cash, a cash equivalent, or which can be converted into cash within one year. If an organization has an operating cycle lasting more than one year, an asset is still classified as current as long as it is converted into cash within the operating cycle.
Examples of Current Assets
There are many types of current assets, which vary by industry. Generally, the following asset types are classified as current assets within most industries:
Cash, including foreign currency
Investments, except for investments that cannot be easily liquidated
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The Order of Liquidity
These items are typically presented in the balance sheet in their order of liquidity, which means that the most liquid items are shown first. The preceding example shows current assets in their order of liquidity. After current assets, the balance sheet lists long-term assets, which include fixed tangible and intangible assets.
How Current Assets Information is Used
Creditors are interested in the proportion of current assets to current liabilities, since it indicates the short-term liquidity of an entity. In essence, having substantially more current assets than liabilities indicates that a business should be able to meet its short-term obligations. This type of liquidity-related analysis can involve the use of several ratios, include the cash ratio, current ratio, and quick ratio.
The main problem with relying upon current assets as a measure of liquidity is that some of the accounts within this classification are not so liquid. In particular, it may be difficult to readily convert inventory into cash. Similarly, there may be some extremely overdue invoices within the accounts receivable number, though there should be an offsetting amount in the allowance for doubtful accounts to represent the amount that is not expected to be collected. Thus, the contents of current assets should be closely examined to ascertain the true liquidity of a business.
Terms Similar to Current Asset
Current assets are also known as current accounts.