Definition of Current Assets
The current asset is an item of the balance sheet that shows the value of all the assets which are easily convertible into cash within a year. Current assets include accounts receivable, prepaid expenses, cash, cash equivalents, inventory, marketable securities, and other liquid assets. It is also known as current accounts in the United Kingdom.
Explanation of Current Assets
In terms of daily basis funding, current assets are the most important source of business to meet the short-term liabilities. Similarly, accounts receivable are included in the category of a current asset because it can be expected to be paid within a year. There is a provision of an amount which is not fully recovered after the credit sale within a year, and it is called allowance for the doubtful account, which is subtracted from accounts receivable. It is not recovered in full, it will be written down as a bad debt expense.
Inventory is considered as a current asset item but this item should be taken with a grain of salt. It is not very liquid as compared to other current assets. The raw material, work in process and finished goods is considered as a portion of business’s asset.
Marketable securities are very liquid securities that can be converted into cash at a reasonable price. Maturity of these securities is less than one year that is why they are very liquid. Furthermore, the rate at which security is purchases may affect the price of the security.