What are current assets?
Current assets are resources a business owns that it expects to use up or convert into cash within twelve months, such as cash, stock and money owed by customers.
What current assets means
The balance sheet splits assets into two groups. Fixed assets, such as equipment and property, are held for the long term. Current assets are short term: they move through the business as part of normal trading and should become cash within a year.
They are usually listed in order of how easily they turn into cash, from the least liquid to the most, or the reverse depending on the format used.
Examples
- Stock (inventory): goods for resale, raw materials and work in progress
- Debtors or accounts receivable: money customers owe you
- Prepayments: costs paid in advance, such as annual insurance
- VAT refund due from HMRC
- Cash at bank and in hand, including petty cash
- Short-term investments that can be sold quickly
Example
A wholesaler's balance sheet at 31 December shows:
| Current asset | Amount |
|---|---|
| Stock | £65,000 |
| Trade debtors | £48,000 |
| Prepayments | £3,000 |
| Cash at bank | £22,000 |
| Total current assets | £138,000 |
Its current liabilities are £92,000, giving a current ratio of 1.5 and working capital of £46,000. But only £70,000 is cash or debtors; the rest depends on selling stock.
Why it matters for your business
Current assets show how much the business has available to pay its short-term bills. Comparing them with current liabilities tells you about liquidity, and watching what they are made of tells you about risk. Large and growing debtor balances can mean customers are paying late; rising stock can mean products are not selling. Both tie up cash that could be used elsewhere.
How they are valued
Stock is shown at the lower of cost and what it can be sold for, so damaged or slow-moving stock should be written down. Debtors that are unlikely to pay should be written off or provided for. Overstating current assets makes the business look healthier than it is and can overstate profit.
What lenders look for
Banks and asset-based lenders often lend against current assets: invoice finance against debtors, stock finance against inventory. They will look at the quality of those assets as much as the total, asking how old the debts are, whether customers are reliable and how quickly the stock sells. Clean, up-to-date records of debtors and stock make it easier and cheaper to borrow.
Common questions
Yes. Stock held for resale, raw materials and work in progress are current assets because they are expected to be sold or used within the normal trading cycle. Equipment used to make the stock is a fixed asset.
Current assets are expected to become cash or be used up within a year, such as stock, debtors and cash. Fixed assets are held for long-term use in the business, such as machinery, vehicles and property, and are depreciated over several years.