You’re very thirsty, and someone offers you either a glass of water or a glass of ice. Of course, you gladly accept the water—even if you’re hot—because it’ll immediately quench your thirst. The ice takes too long to melt.
Think of current assets—also frequently (and aptly) referred to as liquid assets—as the glass of water your business can “drink” if it’s thirsty for cash. Your long-term assets, meanwhile, are that glass of ice—you can’t convert these assets to hard currency (i.e., water) as quickly. Even when your business is on track to succeed in the long-term, current assets can be helpful if you need extra money to cover short-term expenses.
What is a current asset?
A current asset—sometimes called a liquid asset—is a short-term asset that a company expects to use up, convert into cash, or sell within one fiscal year or operating cycle. Non-current assets, on the other hand, are long-term assets that cannot be readily converted into cash within one year.
Understanding the different types of assets is essential because it determines how they get listed on a balance sheet (a financial document that gives a snapshot of a business's financial health at a given time). There are three categories on a balance sheet: assets, liabilities, and equity. Since balance sheets are organized in order of liquidity and current assets are the most liquid assets, they’re listed first under assets.
7 types of current assets
While cash is the most obvious current asset, it’s not the only one. Here are the seven main types of current assets, listed in order of liquidity (which is how they should be listed on a balance sheet).
1. Cash and cash equivalents
Cash is simple: It’s how much money you have in the bank. Cash equivalents, meanwhile, are things that can easily be converted into cash, like short-term savings bonds, short-term investments, and foreign currency.
2. Marketable securities
Marketable securities are investments that can be readily converted into cash and traded on public exchanges. This applies to cryptocurrency, for example, and other more standard marketable securities and short-term investments that are easy to sell.
3. Accounts receivable
Any of your business’s outstanding debts or IOUs are considered accounts receivable. It’s the money that clients or customers still owe you for services already rendered or goods already delivered.
Inventory covers the products you sell and is listed on your balance sheet as finished goods, works-in-progress, raw materials, and supplies. However, not all inventory counts as a current asset; any inventory you think you’ll be holding onto for more than a year should be considered a non-current asset and listed as such on your balance sheet.
Supplies are tricky because they’re only considered current assets until they’re used, at which point they become an expense. If your company has a stock of unused supplies, list them under current assets on your balance sheet.
6. Prepaid expenses
Prepaid expenses include anything you’ve paid for but expect to benefit from over time. If you’ve paid for a year-long lease or an extended insurance policy, you have prepaid expenses. Report these on your company’s income statement over the period the payment covers.
7. Other liquid assets
This is the catchall category. If you have any other current assets that can easily be converted into cash within a year (like promissory notes or tax refunds, for example) that do not fit into any of the above categories, list them here.
How to calculate current assets
Once you’ve listed your current assets on your balance sheet in the order outlined above, it’s easy to calculate your total current assets—just add them all up. Here’s the formula:
Current Assets = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Supplies + Prepaid Expenses + Other Liquid Assets
Another way current assets can be used on your balance sheet is for calculating liquidity ratios. By showing you the balance of assets to liabilities, liquidity ratios give you a sense of your company’s financial health and help you understand whether it can meet its short-term financial obligations. Here are some common types of liquidity ratios.
Your current ratio is the ratio of current assets to current liabilities, which are debts you must pay off within the year. Luckily, this calculation doesn’t require advanced math. The formula for obtaining your current ratio is:
Current Ratio = Current Assets / Current Liabilities
Your quick ratio helps you understand how well your company can meet its financial obligations in an even shorter term. Instead of looking at your total current assets, a quick ratio only considers assets that can be converted to cash within 90 days. Here’s the formula for obtaining your quick ratio:
Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / (Short-term Debt + Accounts Payable + Accrued Liabilities and Other Debts)
Net working capital
Calculating net working capital gives you a clear view of your company’s liquidity, short-term financial health, and efficiency by showing you how much money you could have right now. It’s a meaningful calculation and an easy one. The formula for net working capital is:
Net Working Capital = Current Assets - Current Liabilities
Current assets FAQ
What are some examples of current assets?
Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.
What’s the difference between current and non-current assets?
Current assets are short-term assets that can be used up or converted to cash within one year or one operating cycle. Non-current assets are long-term assets that a company expects to use for more than one year or operating cycle.
Is cash a current asset?
Yes, cash is a current asset, as are “cash equivalents” or things that can quickly be converted into cash, like short-term bonds and investments and foreign currency.