What are current assets? Definition and Examples

Table of contents

• What are current assets?
• Key characteristics of current assets
• Formula for current assets
• Examples of current assets
• Current vs. non-current assets
• Current vs fixed assets
• FAQs on current assets

Key takeaways

• Current assets refer to cash and assets you expect to turn into cash in the short term (within a year). They include inventory, accounts receivable, prepaid expenses, and short-term securities.
• To calculate, add all cash and other current assets together. The formula is: Current assets = cash + accounts receivable + inventory + marketable securities + other short-term assets.
• Current assets appear with long-term assets on the balance sheet, but are different from non-current assets and fixed assets.
• Strategic management of current assets is critical to protect cash flow.

What are current assets?

The definition of current assets includes cash, and business assets like inventory that you expect to convert into cash (sell) within a year.

Selling current assets gives your business the cash to pay its current liabilities such as operating expenses, bills, and loan payments.

Key characteristics of current assets

Current assets:

• Are often tangible, physical things that can be converted into cash within a year
• Provide financial benefit to the business by allowing it to cover day-to-day expenses through their sale or use
• Typically don’t lose value over time (so you don’t depreciate them on your income statement ), unlike fixed assets

Wondering how to find current assets in your accounting records? They're on the balance sheet in the current assets section. Check out Harvard Business School's tips on how to read a balance sheet.

Formula for current assets

To calculate your current assets, just add up your cash and any other assets that you’re able to turn into cash within a year. Here's the formula:

Current assets = cash + accounts receivable + inventory + marketable securities + other short-term assets

For example, a catering company has $20,000 in the bank and $500 cash on hand. It also has $3,000 of food inventory and $500 in miscellaneous supplies (napkins and disposable plates). Clients owe the company $10,000 in accounts receivable.

Based on these numbers, the catering company has $34,000 in current assets. This number doesn't include the catering company's capital (non-current) assets such as cooking equipment, and delivery vans as those items won’t soon be converted into cash.

Current assets examples

Here's a list of current assets:

• Cash in the till or the bank
• Inventory to be sold to customers
• Supplies for manufacturing and other consumables
• Accounts receivable – payments due to come in
• Prepaid expenses like annual insurance policies and software subscriptions
• Marketable securities – stocks, bonds, and other tradeable investments to be sold within one year
• Other short-term investments, like money market accounts and certificates of deposit (CDs)
• Notes receivable – loans owed to your business to be paid within one year

Current assets vs. non current assets

While current assets are going to be converted into cash within the year, non-current assets (also called capital assets) are designed to last for several years.

Non-current assets are larger investments that support your business for years – things like commercial property, manufacturing equipment, computers, and vehicles, and intangible assets like goodwill, patents or customer lists. They’re usually harder to liquidate.

While current assets have a direct and continual effect on your cash flow, non-current assets also affect it significantly.

Retailers earn revenue by selling inventory (a current asset), and buying new inventory is a major and regular expense. When the retailer is starting out or wants to expand, they’ll invest in non-current assets – a hit to cash flow. And if they’ve borrowed to buy the non-current asset, that means a loan payment every month.

Current vs fixed assets

Fixed assets are treated as non-current assets. They’re the physical assets listed above – equipment, vehicles, buildings, and so on – but not the intangible assets (like long-term securities, goodwill, patents, trademarks, and customer lists. Fixed assets appear with other long-term assets on the balance sheet, but are usually separate from intangible non-current assets.

In a bookstore, say, the books for sale are current assets while the shelves, display tables, and the building are fixed assets.

A business needs a plan for both its current and fixed assets to be financially stable and to grow. In the bookstore’s case, the books directly affect the company's liquidity – if they don't sell the books, they can't pay their bills. But the fixed assets also play a significant role in the company's ability to sell the books, and are the big investments a business needs to make when starting out or expanding.

FAQs on current assets

Explore these FAQs to better understand and manage your current assets.

How do current assets appear on a balance sheet?

Current assets are in the assets section of the balance sheet. They get added to non-current assets to determine your total assets.

When you subtract your total assets from your current liabilities (your business debts), the difference is your equity – how much your business is worth. If you liquidated (sold) everything now, you'd be left with the equity.

These numbers play into key financial metrics like the current ratio:

Current assets / current liabilities = current ratio

The current ratio helps clarify your short-term financial stability by showing how easily your current assets can cover your current liabilities.

Check out this government resource on the definitions of current assets and liabilities

How can I manage my current assets to strengthen my business’s financial health?

There are several things you can do:

• Make sure your inventory is turning over – the faster you sell inventory, the more quickly you collect cash on sales
• Collect on your accounts receivable by getting clients to pay your invoices faster
• Keep enough cash in reserves to cover unexpected expenses or falls in revenue

Here’s more on managing your inventory

How do current assets affect my business’s ability to secure financing or loans?

Lenders use your current assets to judge your liquidity and ability to repay loans – they want you to have enough current assets to stay on top of your current liabilities. They also want to make sure you don't have stagnant current assets that aren't likely to turn into cash – like inventory that doesn't sell or accounts receivable (your invoices) that aren't likely to get paid.

What’s the difference between operating current assets and non-operating current assets?

Operating current assets provide you with revenue. When you sell inventory, turn supplies into products to sell, or collect accounts receivable, you earn revenue. Non-operating current assets (like interest-bearing savings accounts) create non-operating income – money your business earns from investments that are not directly related to your main line of business.

How can fluctuations in current assets affect my business’s profitability and growth?

Fluctuations in current assets can reveal a lot about your business’s operations. For example, low cash reserves or accounts receivable may signal trouble paying bills. On the other hand, high levels of current assets aren’t always ideal. If customers aren’t paying invoices on time, high accounts receivable could hurt cash flow. Similarly, slow-moving inventory may look good on paper, but it doesn’t help cash flow. And while having lots of cash might seem positive, it could indicate you're not investing in growth.

Manage your current assets well to help boost liquidity and keep your business financially stable. With Xero, you can easily track and optimize your cash flow, ensuring that your current assets are working for you, not against you. Regular reviews of your current assets—like cash reserves, accounts receivable, and inventory—help you identify opportunities to turn assets into cash and make strategic decisions.

By leveraging Xero’s tools for financial reviews and planning, you can boost revenue, fuel growth, and enhance your business’s stability. Start managing your current assets more effectively today and watch your business thrive.

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