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.
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Now, delving into the concepts discussed in the article:
1. Current Assets:
- Definition: Current assets are assets that can be converted into cash within a year. They play a crucial role in managing a business's cash flow and are often used to pay off current liabilities.
- Examples: Cash, stock, accounts receivable, short-term investments, and current bank account balance.
2. Debitoor Online Accounting Software:
- Function: Debitoor is an online accounting software that automates the recording and tracking of asset values. It offers a convenient solution for businesses to manage their financial data efficiently.
- Trial Period: The software provides a 7-day free trial for users to experience its features.
3. Handling Inventory:
- Caution: While inventory is considered a current asset, it should be handled with care due to its sensitivity to accounting methods and market fluctuations.
4. Recording Current Assets on Balance Sheet:
- Organization: Current assets are usually organized based on liquidity, with more liquid assets placed higher on the balance sheet.
- Variability: Current assets can vary based on the type of business, encompassing anything with the potential to be turned into cash.
5. Liquidity Ratio:
- Definition: Also known as the liquidity ratio, it assesses a company's ability to meet short-term obligations by dividing total current assets by total current liabilities.
- Significance: A ratio greater than 1.00 indicates the company's ability to cover its current liabilities, which is crucial for creditors assessing short-term financial health.
6. Current vs. Long-Term Assets:
- Distinction: Accounts receivable expected to be paid within a year are considered current assets. However, if payment extends beyond a year, they are classified as long-term assets.
- Other Long-Term Assets: Intellectual property (patents or copyrights), equipment, and other items used in the business fall under long-term assets.
7. Assets in Debitoor:
- Recording: Debitoor allows businesses to register both long-term and current assets, facilitating easy tracking and management.
- Depreciation/Amortization: The software enables users to enter depreciation or amortization, essential for items like prepaid expenses.
- Visibility: Debitoor provides a clear view of adjustments to accounts, aiding businesses in making informed financial decisions.
In conclusion, understanding and effectively managing current assets are pivotal for maintaining a healthy cash flow and meeting short-term obligations, and Debitoor offers a user-friendly platform for businesses to achieve these financial objectives.
