Current Assets Accounting Definition + Examples

A six-month insurance policy is usually paid for up front even though the insurance isn’t used for another six months. Even though these assets will not actually be converted into cash, they will be consumed in the current period. One important rule to note when accounting for long-term assets is that they appear on the balance sheet at their market value on the date of purchase.

Current assets are typically liquid, meaning they can be quickly converted into cash. Non-current assets, on the other hand, are typically not liquid. Investors use current assets as a key metric to evaluate a company’s short-term financial health and liquidity. They use the current assets to understand the ability of the company to recover the financial obligations shortly. This section is important for investors because it shows the company’s short-term liquidity.

Current Ratio (Working Capital Ratio)

Capital investment decisions are long-term funding decisions that involve capital assets such as fixed assets. Capital investments can come from many sources, including angel investors, banks, equity investors, and venture capital firms. Capital investments might include purchases of equipment and machinery or a new manufacturing plant to expand a business. In short, capital investments for fixed assets mean a company plans to use the assets for several years.

Marketable securities are short-term investments easily bought or sold in public financial markets. They are highly liquid, meaning they can quickly convert to cash without losing value. The generally accepted accounting principles (GAAP) mandated for listed companies highlight them as the first account in the balance sheet.

Current Assets Formula

These shares would not be considered liquid and, therefore, would not have their value entered into the Current Assets account. However, for companies whose operating cycle is longer than one year, any Asset expected to be converted into cash within the operating cycle can classified as a Current Asset. An operating cycle is the average period of time it takes for the company to produce the goods, sell them, and receive cash from customers. It’s important to understand the difference between short- and long-term assets. You need to know what your cash ratio looks like in relation to your liquidity ratios.

To get the most from analyzing Current Assets, you shouldn’t look at them based solely on their absolute values. You should also use Current Assets to calculate are any assets easily converted into cash within one calendar year various ratios that can yield insights into the operating performance. Here are some formulas that will help you when dealing with Short-Term Assets.