What is Current Asset?


What is Current Assets? Current assets are all those assets that are owned by the company that is going to be in operation within a specified period of time. In accounting, a current asset usually is any asset that can fairly be expected to be consumed, sold, or used during the current operating year or operating period or the financial year. This does not necessarily mean that the cost of an asset will be depreciated over time, although it may be. Rather, the term current assets indicates that the cost of the assets actually incurred is less than their fair market value at the date of the sale or transfer.

In every organization, there are always assets and liabilities. The only difference is that assets come with a cash price while liabilities come without a cash price. The cash price is the amount by which an asset’s cash value less the net book value of that particular asset is greater than its cost. This means that for every dollar of assets an organization possesses, it also has to pay for a dollar of liabilities.

How are these values calculated?

The costing process is done using the replacement cost method. For assets bought or transferred between periods, the new cost is compared with the previously existing cost to determine if the net gain (if equal) or loss (if greater) is better than the existing value. If there is a difference, cash payments received must be higher than the cash payment initially received to take account of the depreciation factor.

Current assets are those assets that have a definite value at a specified date. A current asset is usually an asset that is producing surplus (and thus can be used as collateral for loans and leases) or an asset that is producing non-income producing surplus (and thus is not easily liquidated to meet immediate operating requirements). A current asset also may be a fixed asset such as a plant or building.

When should a company review its current assets?

A company should review its assets as follows: First, current assets are those that a company can easily and quickly re-value. This means that the amount of gain realized from a sale or transfer of a specific asset can easily be compared with the current value of that asset. Second, current assets are those assets that are depreciating in relation to current costs of production. If production continues at the same rate over time, an asset that is not producing surplus can lose value.

Current assets are those that will depreciate in value over time. That is not to say that these assets cannot gain value in the future. However, if production is increasing at a rate that exceeds the rate at which prices of goods and services increase (which varies significantly by geographic region), an asset’s value may decrease if demand increases faster than the supply. A company needs to examine its investment portfolio to see how the mix of assets currently available affects its net worth.

Current assets must be liquidated to meet short-term obligations, such as payroll, inventory, and advertising campaigns. Net Worth and Cash Flow are not the same thing. Net Worth is the sum of net worth, which represents the worth of a company’s tangible assets less its liabilities, divided by its equity (the value of all equity). Cash Flow is the total amount of cash a company makes during a period of time, less the cost of operations, and more importantly, the net effect of debt and equity financing. These two concepts are often interdependent. A company that takes on debt to finance its operations can have a negative cash flow and a negative net worth.

To recognize current assets or liabilities, a company must assess its current balance sheet, also known as its statement of comprehensive income. The statement of comprehensive income will show the operating income of the company. It will also show the net income, which is the difference between total assets and total liabilities. A company’s balance sheet is prepared monthly, quarterly, and yearly.

A company’s balance sheet is usually prepared by dividing up current assets and liabilities between current liabilities and long-term liabilities. This division is made on the basis of estimated values for the assets and liabilities that would be affected if the company did not exist. This is why current assets are sometimes referred to as current assets and current liabilities. A company’s cost of capital is also determined based on the total current assets, including current equipment, existing inventories, and accounts receivable.