A current asset is one that a corporation owns and can be quickly sold or consumed, resulting in liquid cash transfer. A current asset is vital to a company because it allows them to use money regularly and clear daily business expenses. To put it another way, current assets are assets that are only supposed to last a year or less.
Current assets are classified into several groups:
- Stock – It can be further divided into Raw material, work in progress, and finished products. Having the correct amount of stock in hand can be challenging. If you buy too much, your cash will be locked up for a long time, and your stock will become outdated or obsolete.
- Debtors – These are the persons you have to receive the money for the goods sold to them on a credit basis. Keep track of debtors to ensure that customers pay on a timely basis. Quickly but firmly pursue any late payers.
- Prepayments – Prepayments are goods or services for which you have been invoiced but have not yet received payment. For example, annual insurance premiums are charged in advance.
- Accrued income – Accrued incomes are sometimes paired with prepayments. Work you’ve (partially) done but haven’t yet invoiced to the client, probably because the job isn’t finished.
- Other Debtors – money owing to you by somebody who isn’t a client. This may be a refund of tax owed to HMRC, or the company could have made a loan to another company.
- Bank account – Savings and current accounts are included in a bank account. You cannot merge your savings and current accounts if you have a healthy deposit account balance but an overdraft on your current account. The deposit account, as well as the overdraft in current liabilities, should be listed here.
- Cash in hand – Petty cash is kept in hand. To reduce the risk of robbery, this balance should be kept low.
Certain uses of Current Assets:
- Current assets may be used to pay bills and make routine payments.
- It offers details about the corporation’s cash and liquid assets.
- Creditors and investors scrutinise the company’s current assets to determine the corporation’s risks and benefits.
Examples of Current Assets
- Cash and equivalents
- Short-term investments (marketable securities)
- Accounts receivable
- Inventory
- Prepaid expenses
- Any other liquid assets