Basic Accounting Concepts – What is Current Asset

Exploring basic accounting concepts it is important to get proper understanding of main accounting definitions and terminology, which will help you to learn accounting properly and also master the accounting practice. In this article we will be exploring current asset concept.

What is Current Asset?

If we refer to the exact definition of the current asset we can that it is cash or another asset which can be expected to be realized in cash, sold or consumed within a year or less due to the normal operations of the business. This definition includes several aspects.

• First, cash is indicated separately, since cash is by its nature current asset, which is being constantly used in the operations of the business.
• Second, other assets are separated from cash, so decision on whether the asset is current or not will depend on the analysis of other assets except for cash.
• Third, for the asset to be considered as current way of usage is important, i.e. the particular item will have to be converted into cash, sold or consumed in the operations of the business.
• Fourth, the period of usage, i.e. it should be a year, which is treated a normal usual period of operations for the business and during this period the asset needs to be used in one of the mentioned ways in order to be attributed to the current asset category.

Examples and Relation with the Financial Statements

To support the above definition, the examples of current assets are:

• accounts receivable, where the customers are obliged to pay within a period less than a year (in some types of businesses there might be long-term accounts receivable, which are due within the period more than a year, such receivables are treated as long-term assets)
• inventory, including raw materials, work in progress, finished goods, goods for sale, office and other supplies. These items are also consumed within one year
• marketable securities, prepaid expenses.

Important to remember that current assets are reflected in the financial statements on the assets side of the balance sheet and total value of these assets needs to be calculated. This is important since it shows how much liquid assets the business has and whether it is able to fulfill its current liabilities, which are usually compared with current assets.Use custom trading pins to promote the basic concept of finance while promoting your company.