Current asset is a term used to describe the assets from which the entity expects to receive future economic benefit within twelve months or within it normal operating cycle.
In the financial statements, there are two categories of assets that are displayed over the face of the balance sheet. One is Non-current assets and the other is current assets. Here our focus is on current assets.
Current assets include items such as:
- Cash in hand – this is usually the petty cash amount which company keeps inside the office to pay and meet daily expenses and make payments of small amounts.
- Cash at bank – this is the amount which company receives from the customers and used to pay its suppliers and vendors. Staff salaries are also paid through this account. Usually, the entity keeps more than one bank account to run its business.
- Short term investments – this is the investment which the entity plans to sell within next 12 months. If it has plans to sell beyond that, it will be taken in the long term investment section of the balance sheet.
- Short term prepayments – these are the payments given as advance for certain types of work or as a guaranteed payment for the future project undertaken usually within the 12 months period.
- Inventories/ stocks – goods which are kept by the entity for sale or for use in the production process. Inventories may be in the form of raw materials, work in process and finished goods.
- Accounts receivable – this is the amount due from customers on making the credit sales. This amount is presented on the balance sheet after deducting the allowance for doubtful debt which is an estimated figure calculated at the end of the accounting period using a rate applied over the ending balance of accounts receivable.
In order to meet the daily operations of the business, an entity must have at least equal amount of current liabilities and current assets. Otherwise, if the current liabilities are more than the current assets for a significant period of time, the entity’s going concern assumption will be in danger.