Debitoor Dictionary

Accounting terms explained in a simple way

Current assets - What are current assets?

A current asset is either cash or an asset that can be sold (e.g. stock) that can be converted into cash within a year and is often used to pay off current liabilities

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Current assets (apart from being ready cash) can be sold or converted into cash within one year of acquisition and play a vital part in managing the cashflow of your business.

What can be considered a current asset?

Generally, current assets consist of your current stock, what's owed to you by your customers (accounts receivable), any short-term investments (such as easy access short-term deposit accounts), and, of course, cash and what's in your current bank account.

Current assets can also vary depending on the type of business. Because current assets include stock and cash equivalents, this means that anything that has the potential to be turned into cash should be recorded as a current asset in your balance sheet.

Your company’s inventory is technically a current asset, however, it should be handled carefully. Inventory can be affected by certain accounting methods and by market fluctuations, so it is important to keep other current assets in mind.

Current assets in accounting

When recording current assets on the balance sheet, they are usually organised based on their level of liquidity. This means that the more easily they can be converted into cash, the higher up on the document they will be placed.

Current assets and liquidity

Current assets can also be referred to as "liquid assets", and a quick gauge of your financial state is the “liquidity ratio”. This establishes whether or not you have the funds to meet your short term obligations and is calculated by dividing your total current assets by your total current liabilities.

The result will show the number of times your current liabilities are covered. So, if the ratio has a value greater than 1.00, then they are covered!

This figure can be important to creditors, for example, who will view the ratio as your company’s ability to meet deadlines and obligations in the short-term.

Current or long-term assets?

Although most accounts receivable should be expected to be paid off within a year, if payment for an invoice looks like it may not fall into this category, it should not be included as a current asset, but as a long-term asset.

Other long-term assets include intellectual property such as patents or copyrights, equipment or gear used in your business, etc.

Assets and Debitoor

In Debitoor, you can register both long-term and current assets. Keep track of current assets and enter depreciation/amortisation if necessary (such as for prepaid expenses). Debitoor makes it easy to see any adjustments to your accounts.