Short definition: Current assets are assets that a company expects to convert into cash or use up within one year or its operating cycle, whichever is longer.
Explanation: These assets are considered to be the most liquid assets on a company’s balance sheet. They play a crucial role in a company’s ability to meet its short-term financial obligations. Current assets are vital for day-to-day operations and maintaining financial stability.
Example: Common examples of current assets include:
- Cash and cash equivalents (money in the bank, short-term investments)
- Accounts receivable (money owed to the company by customers)
- Inventory (goods held for sale)
- Prepaid expenses (expenses paid in advance, such as rent or insurance)
- Marketable securities (short-term investments easily converted to cash)
Additional information (optional): The composition of current assets can vary depending on the nature of the business. For example, a retail company might have a higher proportion of inventory compared to a service-based company.