When you look at the asset side of company’s balance sheet, you will find a category at the end of the balance sheet called current asset. It will let you know the liquid capital the company has to pay its current liabilities. This means, it will tell you how much money is available with the company for business immediately.
Under current assets, you will find those assets which are owned by the company and it can be converted into cash for business purposes or consumed in the business in the operating cycle of the business or within a year from the balance sheet date, whichever takes longer.
In general, operating cycle of most businesses is less than one year. Due to this reason, most businesses tend to think of current assets as those assets that can be converted into cash in one year.
Following assets are included under the head current assets on the balance sheet;
- Marketable Securities
- Accounts receivable
- Prepaid expenses
To know company’s liquidity position, analysts generally find out it’s working capital or current or quick ratio.
Working capital is the difference between company’s current asset and current liabilities. Companies with high working capital attracts investors to invest in it.
Cash-on-hand means, physical cash available with the cashier and the bank balance on the balance sheet date. It includes petty cash that you have kept to make small payments for your business where you do not want to use bank account. If the company has no cash, it might be headed towards bankruptcy.
Shares or securities that can be readily sold when cash is needed. In general, companies invest excess cash (cash in excess of immediate needs) temporarily in marketable securities to get some return. Please note, marketable securities do not include those investments that are intended to be for long term.
Some companies report both cash and marketable securities into account referred to as Cash and cash equivalent under the head Current assets.
When you sell goods on credit which need to be paid by customers in a short period of time, its known as accounts receivable. This means, it’s the payment which company has not yet received from it’s customers but will be receiving within 12 months from the balance sheet date. As its treated as an asset due to be received within a year, its shown as current asset.
To encourage customers, companies in general allow their customers to buy now and pay later facility. In general the period of credit use to be 30 to 45 days of the sale. Therefore, account receivable is the amount due from customers who have purchased goods from company or taken services but have not paid as at the balance sheet date either due to the credit period or for some other reasons.
Inventory represents goods available for sale, work-in-progress and raw materials used to produce company’s product. Work-in-progress are finished goods which are partially completed.
Basic methods of accounting for inventory includes FIFO (first in, first out), LIFO (last in, first out) and average costs.
Prepaid means paid in advance. It’s the future expenses which have been paid in advance but have not yet consumed. Prepaid expenses are shown under the head current asset in balance sheet.
A common example is the case where insurance premium paid for more than one year and advertisement charges paid for which benefit is to be received beyond balance sheet date are treated as prepaid expenses. If these expenses are not incurred, then the company should have more cash than the available balance today.
You need to place those payments under Prepaid expenses head for which payments are made but company has not yet received benefits till the balance sheet date, but for which the company is expecting to receive benefits within the year.