Current assets are balance sheet assets that can be converted to cash within one year or less. Accounts that are considered current assets include cash and cash equivalents, marketable securities, accounts receivable, inventory, prepaid expenses, and other liquid assets. These short-term assets are a key component of a company’s net working capital and short-term liquidity.
Current Assets Formula
It’s easy to calculate the current assets of your company. However, it’s important to make sure that all assets classified as “current” are included in the calculation, since there are many. We will show you the formula and discuss each of the components below, including an example calculation.
The current assets formula is:
Current Assets =
(Cash & Cash Equivalents) + (Accounts Receivables) + (Inventory) + (Marketable Securities) + (Prepaid Expenses) + (Other Liquid Assets)
Cash & Cash Equivalents
Cash includes bills, currency notes, coins, checks received but not yet deposited, and petty cash. Cash equivalents typically include money in bank accounts, money market accounts, and short-term investments with a maturity of 90 days or less (like U.S. Treasury bills and commercial paper). Cash and cash equivalents are typically reported on the balance sheet as the first current asset.
Accounts receivables represent the value of a company’s outstanding invoices owed by customers for products and/or services delivered. Accounts receivables should ideally be collected within 90 days or less with a 90% collection rate. They are considered current assets because they can be converted to cash when collected and typically have repayment terms between 30-90 days.
Inventory refers to any raw materials, in-process products, and/or finished goods that are ready or soon to be ready for sale. Inventory is considered a current asset because it is converted to cash when sold. Ideally, inventory should be sold within one year or less to risk overstocking.
Marketable securities represent a company’s short-term investments or unrestricted financial instrument available for sale. Marketable securities are considered current assets because their maturities are typically less than one year. They are usually traded on an open market – such as a public stock exchange or public bond exchange – at a set price to readily available buyers.
Prepaid expenses are expenditures paid for in advance. They are reported on a balance sheet as current assets until the bill actually becomes due. Prepaid expenses are short-term assets because they typically come due within a few months of being recorded. One example of a prepaid expense is prepaid rent.
For example, if your rent is $1,000 per month and you choose to pay for the next 3 months at once, your prepaid rent asset account will increase to $3,000. At the start of each month when rent is due, you’ll reduce your prepaid rent account by $1,000 and recognize an equal rent expense of $1,000.
Other Liquid Assets
Other liquid assets include any other assets that can be converted to cash within one year. This can include previous long-term investments that are maturing within a year or a property or piece of equipment that is set to be sold within a year.
Current Assets Example
To calculate current assets, all you have to do is add your short-term balance sheet assets together that can be converted into cash within one year. Let’s take a look at the following example for a better understanding.
Let’s say that your company’s short-term assets include the following on your balance sheet:
- Cash & Cash Equivalents: $90,000
- Accounts Receivable: $30,000
- Marketable Securities: $120,000
- Inventory: $50,000
- Prepaid Expenses: $18,000
Based on the above data, your short-term assets are calculated as follows:
$90,000 + $30,000 + $120,000 + $50,000 + $18,000 = $308,000
Why are Current Assets Important?
Current assets are important because they are used to pay for operational expenses and other short-term financial obligations. The value of your short-term assets to your current liabilities gives you insights into your short-term liquidity, also known as your net working capital. Typically, more short-term assets than liabilities is good, while fewer short-term assets than liabilities results in financial insolvency.
However, the ideal ratio of your short-term assets to your current liabilities is between 1.2 to 2. Anything lower than 1 means your short-term assets are not enough to cover your current financial obligations. Although, if your current ratio is higher than 2, it may indicate that your company isn’t efficiently using its short-term assets to generate revenue. For more information on short-term liquidity, you can read our guides on the current ratio and the quick ratio.
How to Calculate Average Current Assets
The average current assets of a company is the average value of a company’s short-term assets from one period to another. Average current assets is typically calculated as average annual assets. This gives business owners an idea of the average monthly short-term assets they should expect, which helps them manage, plan, and budget for the future.
For example, to calculate average total assets for the year, add the total current assets from the end of the previous year to the total short-term assets from the end of the present year, and then divide by two. The formula for the average current assets is as follows:
Average Current Assets =
(Total current assets for previous period + Total current assets for current period) / 2
For example, if on Dec 31st, 2017, your current assets are $97,000, and then on Dec 31st, 2018, your current assets are $73,00, your average short-term assets for the period would be:
($97,000 + $73,000) / 2 = $85,000
Current assets are key to a company’s short-term liquidity. Assets are classified and reported as short-term assets on a company’s balance sheet if they can be converted to cash within one year or less. Typically, a company that has more short-term assets than current liabilities is considered financially stable.