What is current assets in accounting? Accounts receivable represents the goods that a customer has bought from your firm over the period of time. Accounts payable represent those goods which your firm has supplied to customers during the period of time they have purchased from you. It will be very useful for you to keep a list of all your customers at the end of each fiscal year.
In this article we will deal more with the concept of current assets in accounting and why it matters. The reason why is because a firm needs to have its cash assets, its fixed assets and its inventory, to name just three items, in order to operate profitably. If any one of these three items is missing, or is not liquid enough, then the business cannot prosper.
Let us look first at the definition of current assets. Accounting uses the term current assets when it means the total value of the tangible assets of a firm at the moment of a sale or transfer. Now, what is meant by the phrase current value? It means the price paid for an asset today at the current value of that asset. Now, firms cannot run continuously on paper-based books. So, what is meant by the current value is a book value of an asset, and that is based on present prices at the current date.
On your balance sheet, an account reconciliation report is required showing the difference between the financial statement and the net asset value of your firm. That difference is what is referred to as the equity. It is called equity because it is the value of the firm less the liabilities it has, less the assets it possesses. The difference is shown on the income statement and then reported as earnings.
What is the definition of current value anyway? Current value is a term that actually is derived from accounting principles. Basically, the definition is as long as the inventory is not current. It is called current when the purchase price is made minus the selling price less the cost of goods sold, less the cost of capitalized items purchased, less the gross cost of good production less the current value of the plant or facility, less the net worth of the acquired tangible assets less the net worth of the acquired liabilities, less the net worth of the underlying assets, less the gross cost of good production less the gross cost of capitalized items purchased less the current value of the plant or facility, less the net worth of the underlying assets. That is, if your firm sells widgets today, the current value of its widgets is zero.
However, you must always remember that your financial statement only lists the value of current assets, not their fair market value at any time. The financial statement only lists the fair market value at the last day of the year. This is why you should never buy assets today with the intention to sell them for more money tomorrow. It just does not make sense.
So what is the current value then? It is the total value of all current assets minus the total value of all assets owned by the firm at the last day of the year. If there are no changes in the value of your firms assets, it will be zero. A positive current value indicates an increase in the value of the firm’s assets because it is more likely that current prices will rise or fall than they are at the end of the year. In other words, the firm has more assets now than it did at the end of the last year and therefore, its net worth has risen.
What is current assets in accounting is very important because it is what determines your net worth. Now that you know what current assets are, hopefully you will not be so quick to buy up other businesses when they become unprofitable and dump their assets for no reason at all. Many business owners get into trouble because they think they can increase the value of their firms by adding on more assets without any increase in value to their firms profits and stockholders’ equity. They are wrong and are often times wildly successful at their endeavors.