Current Assets: Definition, Classification, Calculation, and Example

Definition:

Current Assets refer to an entity’s assets that could be converted to or used within a period of less than one year.

They are the group of liquid assets that are expected to be used, consumed, or converted into cash within 12 months from reporting date. In the balance sheet, these groups of assets are reported separately from non-current assets.

Those assets included petty cash, cash on hand, cash in the bank, accounts receivable, prepaid expenses, cash advance, short-term loans, inventories, and other short-term investments.

Before we go into detail about the definition of current assets, we should understand the definition of assets first.

Current assets are the same as fixed assets, they are reported only on the balance sheet and show their balance at the end of the specific period. None of the current assets are reported in the income statement.

However, if those assets are used or sold, they will be recorded as the cost of goods sold or expenses in those periods in the income statement.

As per IFRS, Assets are:

The Resources that controlled by the entity as the result of past event from which future economic benefits are expected to flow to the entity.

Resource: http://www.ifrs.org

Example:

In general, current assets include the entity’s cash on hand, cash in the bank, inventories, account receivables, and other types of short-term investments.

  • Cash and Cash Equivalent including cash on hand, petty cash, cash in the bank, cash advance, and others noted that easy to convert into cash.
  • Prepaid expenses are also current assets if they are paid for services or goods that are expected to receive within a year. If part of those expenses is expected to be settled for more than one year. Then, part of those should be classified into fixed assets.
  • Account Receivables are those remaining balances from customers as the result of sales on credits.
  • Inventories are mainly the stocks companies hold for their business. They include raw materials, work in progress, and finished goods. Different valuation methods show probably show different values at the end of the year.
  • Short-term deposits from customers are those short-term deposits required by the company policies for its customer. It is sometimes called a security deposit.
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All of these are assets are recorded only in the balance sheet however some current assets will be recorded in the income statement when they are used or sold.

For example, inventories are records as exchange costs of goods sold in the income statements when they are sold to the customers.

Classification:

Current Assets are classed in the assets section on the balance sheet, back to the big picture of financial statements. Basically, there are five types of financial statements.

They are the income statements, balance sheets, statements of change in equity, statements of cash flow, and the last one is Noted to financial statements. The only statements that report current assets are the balance sheet.

And their classification rank from the most liquid assets to the last one. For example, cash and cash equivalence always stay on top of current assets while the others assets like inventories or loans stay on the bottom. However, there is no role to saying that cash must stay on the top.

Calculation:

Calculation of current assets is quite simple if you know the basics of the accounting equation. For example, the formula of the accounting equation is:

Assets = Liabilities + Equity

And,

Assets = Current Assets + Non Current Assets

Then,

Current Assets = Assets – Non Current Assets

  • Assets here are the total net assets at the end of the period. They are the total value of net book value of assets that an entity has during the period which included both current and non-current. The calculation depends on what information is available to you.
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