Current Asset

The current asset, also called a current or liquid asset, is the asset of a company that can become liquid  (become money) in less than twelve months.  For example, bank money, stocks, and financial investments.

We can also understand the current asset as all those resources that are necessary to carry out the day-to-day activities of the company. It is known as current because it is a type of asset that is in continuous motion, can be sold, used, converted into liquid money or delivered as payment without too much difficulty.

In accounting, when we analyze the balance sheet of  a company, we can differentiate between assets, liabilities and equity. Within the asset, we find the current asset, which is the asset that becomes effective in the short term and the non-current asset , which is the asset that becomes effective in a period exceeding one year.

Classification of current assets

Current assets can be classified in the following main items:

  • Non-current assets held for sale.
  • Stocks
  • Comercial debts and other counts under charge.
  • Short-term financial investments.
  • Treasury (boxes and banks).
  • Short term accruals.

How is the current asset financed?

In order to analyze the best way to finance the asset in the short term, it is important to know the concept of working  capital , which is the part of the current asset that is financed with the non-current liability , or what is the same, the assets liquids that are financed with long-term resources. We can say that the working capital is the surplus that results from the current assets of the company and that we can calculate it in two ways:

  • Working capital = Current assets – Current liabilities
  • Working capital = (Net equity + Non-current liabilities) – Non-current assets

Now, with the latter, we know that for the good daily operation of the company the current asset must be greater than the current liability, that is, that the resources we have (current asset) are greater than the short-term debts ( current liabilities) to deal with them. However, given the latter, several situations can occur:

  • Current liabilities greater than current assets:It would be a dangerous situation since we would have more short-term debts than resources to be able to pay them.
  • Current assets the same as current liabilities:We would be facing an equilibrium point in which the liquidity of the company is insured, but at the time that any of our debtors did not pay us on time our liquid assets would be lower than short-term debts and therefore we would be in the situation where the current liability would be greater than the current asset.

The balance sheet of a company is represented as follows. The asset is equal to the liability plus net equity. The working capital is the current assets (or current) minus the current liabilities (which are the debts payable in the short term). The non-current asset was previously known as a fixed asset.

 

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