What are the Current Assets? (Definition and List of Current Assets)

Definition:

Current assets are the group of liquidity assets or resources controlled by the entity and have a useful life for less than one year. Some current assets are expected to be used and converted into cash for less than one year.

The current assets include petty cash, cash on hand, cash in the bank, cash advance, short-term loan, accounts receivables, inventories, short-term staff loan, short-term investment, and prepaid expenses.

For example, accounts receivable are expected to be collected as cash within one year. Do such inventories, expected to sell to customers and concerted into cash within one year.

In financial statements, these groups of current assets are recorded in the balance sheet and show the value at the end of the reporting date. The following is the list of current assets that normally occur or report in financial statements. Current assets are not recording the company income statement, yet they will affect the income statements once the assets are derecognized from the balance sheet.

List (Types) of Current Assets:

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1) Petty Cash:

Petty cash is classified as current assets, and it refers to a small amount of cash used in operation for small and immediate expenses. This cash usually ranks from USD 500 to USD 2,000 based on the size and nature of the operation. And it Is also pending on the nature of the company as well as the decision of the management.

Some companies operate in locations where local suppliers did not accept credit or where few banks in the area required a bit hefty amount of petty cash.

The recording of petty cash moves from cash in the bank or on hand to petty cash and then transfers to expenses at the time of settlement.

Petty cash balance shown in the balance sheet under the current assets section. And sometimes, it is part of the cash and cash equivalence line. You might not be able to see the petty cash amount in the face of the balance sheet, but you could find it in the note to cash and cash equivalence.

2) Cash on Hand:

Cash on hand is the current assets that come from cash sales or cash collection from the entity’s customers. This cash usually does not allow making payment to suppliers before it banks in or transfers to petty cash.

For example, the company sells the goods to customers for a cash amount of $1,000. In this case, we debit cash on hand in the balance sheet and credit sales in the income statement.

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For accounting records, for example, when the entity’s customers settle the goods that they purchase on credit by cash transactions, the accounting record would be debit cash on hand and then credit account receivable. No transaction affects the P&L.

This transaction does not increase current assets. It just transfers from one account to another account under the same class.

Sometimes, the entity might transfer part of its cash on hand into petty cash, and the accounting records would be debit to the petty cash account and credit to cash on hand.

Cash on hand is also classified in the current assets section of the entity’s balance sheet. Cash on hand does not record in the entity’s income statement.

3) Cash in Bank:

Cash in the bank refers to all kinds of money that the entity has in the bank. It can be a current account, savings account, fixed-term deposit, or similar. However, for the fixed-term deposit that has a term of more than one year, that part of the amount should be classed into non-current assets, long-term investment.

Normally, the company performs monthly bank reconciliation to make sure that accounting records are correctly shown the right amount.

Cash in the bank has nature the same as other current assets. It is increasing on debit and decreasing credit. It shows balance at the specific date in the balance sheet.

4) Cash Advance:

A cash advance is also classed as current assets, and its nature is quite similar to cash on hand and cash in the bank. Cash advance occurs when staff needs some cash to spend for some kind of mission or event or some time to purchase sometimes.

For example, sales staff will have their mission in the province or another country. Staff might need some money to pay for their accommodation, traveling, and food. The entity’s policy might allow staff to advance some amount of money equivalence to their estimated expenses for the mission.

For example, the cost of the mission is around USD1,000. The entity may advance to its staff amount USD 1,000, and the accounting records will be credit cash on hand or bank and debit cash advance.

The amount of cash advance will show outstanding until staff settles the advance. Normally, the staff must bring the original invoices to confirm what they spend is for the correct purpose and amount.

5) Short Term Staff Loan:

A short-term staff loan is also the type of current asset. It varies from one company to another. Some company wants to motivate their staff, and they allow their staff to borrow the company’s money for a short-term period like three to six months.

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When the short-term loan is provided to the staff, the company needs to record those outstanding loan amounts in the entity financial statements under the correct assets section. The company might consider the loan on another management account for controlling purposes.

The accounting record for these transactions is simple. We move the amount of loan from cash in the bank or on hand to short-term staff loans. In case the loan is more than one year, then that part of the loan should be classified as long-term assets.

6) Accounts Receivable:

Accounts receivable is the type of current assets as they are expected to collect within one year. This happens when the entity sells goods or services to its customers on credit and the credit period is within one year. It depends on the entity’s policies. Some entity gives 30 days, and some give 60 days.

As long as this credit period is less than one year, we class it into current assets. The accounting record of Accounts receivable is simple.

At the time of purchasing, we just record debit AR and Credit Sales. And at the time of payment, we just transfer from AR to Cash or Bank.

7) Inventory:

Inventories are current assets. Normally, for the production company, there are three types of inventories. Raw material, Work in progress and finish goods.

The raw material is what the company purchases from its suppliers. Work in progress is the kind of in-progress goods, and the cost normally combines the raw material, labor, and other direct overhead.

Finish goods are finished products that are ready for sales. In the balance sheet, inventories are recorded under the current assets section in one line, and an explanation will be shown in Noted to Financial Statements.

Inventories are classified as current assets; however, the process that it takes to convert into cash might be longer than other kinds of current assets like cash on hand, cash in the bank, and account receivable.

The number of inventories at the end of the specific period is shown on the balance sheet. Inventories will record recognize as the cost of goods sold or expenses in the period that they are sold or used.

8) Prepaid Expenses:

There are many kinds of prepaid expenses. For example, prepaid interest expenses, prepaid insurance expenses, as well as prepaid rent.

These things are not classified as expenses yet since the goods or services are not provided. At the time of payment, these expenses are classified as current assets and wait until goods or services are provided.

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The entity can prepare a prepaid expenses schedule to ensure that some prepaid expenses are recorded eventually for certain kinds of prepaid expenses.

For example, Prepaid insurance expenses normally cover 12 months, and you can prepare 12 months schedule to ensure that expenses will be correctly recorded in Financial statements.

Prepaid expenses increase on debit and decrease on credit like other current assets. They are increasing at the time the company paid in advance to the suppliers. In another word, they increase when the company pays for goods or services that they don’t receive.

9) Short Term Investments:

Any short-term investment that is expected to be sold or converted into cash within 12 months from reporting dates should be classed as current assets. These included stocks or any other kind of investment.

10) Short Term Loan:

The company might sometimes provide some small loans to another company or the company under the same group.

Such loans that are expected to be collected within one year should be classed as current assets. However, the part of the loan that is expected to be corrected for more than one year should class as non-current assets.

How to calculate current assets?

Calculation of current assets is very straightforward, or sometimes you don’t need to calculate as it clearly shows the balance sheet. As mentioned above, you can see the total value of current assets at the end of the reporting period in the balance sheet assets section. Most of the balance sheet shows the total amount.

However, you can calculate the current assets on your own if you are not provided the figure. For example, assets equal to liability plus equity. Once you can find the total assets, then you just need to remove the total value of fixed assets from total assets. Then, the remaining is the total value of current assets.

Conclusion:

Current Assets refer to those assets that have their expected conversion period is less than one year from the reporting date. These kinds of assets are shown in the entity’s financial statements by showing the balance at that reporting date. Increasing current assets is on the debit side, and decreasing is on the credit site. Measurement and recognition of current assets should be based on the definition of assets in the conceptual framework.