Accounting Terms: Understanding Current Assets

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In accounting, a current asset relates to an asset which will either be sold or utilized sometime in the future and it is typically recorded on the balance sheet. These assets which often stay on the balance sheet for periods of not less than one year include  inventory, cash, accounts receivable, cash equivalents and other short-term investments.

Working capital of a company includes assets that are to be circulated or implemented, and the inventory changes frequently, therefore, by entry and exit. Current assets can be financed and will not be fully applied by the long-term investors to part with short-term debt and supplier credits.

Current assets are determined by their purpose. After the indirect definition, there is the sum of the values of those assets of a business which are not intended to remain permanently in the company. Thus, they are consequently the assets that are processed as part of the production.

Operating cycle pertains to the average period needed to move from cash to cash in respect of producing revenues. The classification of assets on the balance sheet, generally entails current assets and long-term assets.

Items that go through business processes of procurement, production and sales are assigned to it. The decision as to what assets are to fulfill a purpose and what assets and liabilities are attributable to it, is the responsibility of the company’s management. Self-produced machines will be counted as working capital, they remain permanently in operation – they are an asset.

Slightly different is the definition of current assets in accordance with U.S. GAAP, which relates to only those assets which are within the normal operating cycle and are converted into money, that is sold or consumed. And the business cycle applied is shorter than a year. Similarly, it is defined in the International Financial Reporting Standards, with a clear distinction between fixed and current assets.

The current ratio is computed by dividing the sum of current assets by the sum of current liabilities. It is regularly applied as an indicator of the status of a firm in terms of liquidity, and its capacity to fulfill short-term obligations.

Current assets are listed in the balance sheet on the asset side:

(1) Stocks / inventories

   – Raw materials and consumables
   – Finished products

(2) Receivables and other assets are reported separately for all four points (receivables and assets with a remaining maturity of more than one year)

   – Receivables from goods and services
   – Receivables from affiliated companies
   – Claims against companies on which an interest is charged
   – Other Assets

(3) Securities

   – Shares in affiliated companies
   – Treasury stock
   – Other securities

(4) Cash and cash equivalents

   – Checks, cash in hand, and bank balances

 

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