Examples of Current Assets on the Balance Sheet
In the last post, we explained that when we are talking about a company’s assets, we are really just talking about the value of all the things that a company has. We can see on the example to the right that the company’s assets are listed on the left hand side of the balance sheet. A company’s assets (again, just the stuff that it has that is of value) are usually split into three categories which are current assets, fixed assets and other assets. In this lesson, we’ll be focusing on the current assets section of the balance sheet.
So What Is a Current Asset?
Current assets are formally defined as assets that we expect will be turned into cash within the next year. To help explain this concept, let’s walk through some examples of current assets:
Cash – Companies usually keep some cash in the bank since they’ll need money to pay for their liabilities. Think of this as the checking account of the company where they always want to keep a positive balance. Anytime the company pays off a liability, it comes out of cash (like how your checking account balance decreases when you pay your utility bill). Cash is considered a current asset since it meets the definition above (because it’s cash already).
Accounts Receivable – Say that a grocery store offers a credit card to its customers when they complete a purchase. Instead of the customer paying with cash on the spot, they use the store credit card when they make their purchase. Since the store doesn’t get cash right away, they put these charges in the accounts receivable section of the balance sheet. In this case, the customer is expected to pay off the credit card balance within the next month which is when the store will actually get the cash. Accounts receivable are the rights of the company to collect money from the customer in the future. These rights are expected to be turned into cash (meaning that their customer pays off their outstanding balance) within the next year so this is considered a current asset.
Prepaid Expenses - Consider the example where a company has the option to pay their phone bill monthly or they could get a discount for paying for six months in advance. If they chose to pay the six months of phone service up front, they would put the amount that they prepaid into the prepaid expenses category. This one is a little tricky since they don’t expect to turn this into cash in the future but we still call it a current asset. The reason prepaid expenses are called current assets is that when the next month comes around, the company does not need to pay cash for the phone bill (since they already paid for it).
The Final Example of Current Assets: Inventory
Inventory – The inventory of a company is the final major category in the examples of current assets. Inventory includes finished products and the materials that it takes to make those finished products. Let’s say that you make fabric chairs that require wood, screws and fabric to manufacturer. We’ll use this example to help explain the three types of inventory below:
Raw Material Inventory – This includes the unprocessed materials that will be used to make the product. This is the wood, screws and fabric that the company has purchased but hasn’t starting making into chairs yet.
Work-in-Process Inventory (sometimes also written as WIP) – These are products that are partially finished but not yet ready for sale. If you had chairs that had the wood screwed together but did not yet have the fabric on to finish the chair, this would be considered work-in-process inventory.
Finished goods inventory – This includes fully finished products that are ready to sell to customers. Any finished chairs that the company had on hand would be considered finished goods inventory.
Now, we need to add up the raw material, work-in-process and finished goods inventory to get the company’s total inventory. We consider all inventory as a current asset since the company expects that it can turn the inventory into cash within the next year (meaning that they sell the finished product to a customer). In the next post, we’ll talk about how we treat the machines and other fixed assets that were used to turn the raw material into finished products.
Key Takeaway: Current assets are things of value that the company expects to turn into cash within the next year. The four most common examples of current assets are cash, accounts receivable, prepaid expenses and inventory.
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