What Are Current Assets: Meaning, Examples, and Calculation

Running a business means managing a constant stream of expenses and obligations, from paying suppliers and employees to covering rent, utilities and taxes. 

But what happens when bills are due and your money is tied up in products you haven’t sold yet or invoices that haven’t been paid? That’s where current assets come in.

So, what are current assets, and how do you calculate them?

In this blog post, we’ll break down the definition of current assets, their importance to your business operations and how to calculate them. Whether you’re trying to improve cash flow, secure a loan or simply understand your numbers better, mastering short-term assets is a key step.

What are current assets?

First, let’s clarify what a company’s assets are: they are the resources a business owns or controls that bring value to its operations. 

Current assets are a specific type of asset—resources your business owns and plans to sell, use or convert into cash as part of its regular business operations, typically within a fiscal year. 

Examples of current assets include:

• Cash;
• Accounts receivable (money owed to your business by customers);
• Inventory;
• Marketable securities (such as short-term bonds or stocks);
• Other liquid assets.

Current assets can be either tangible (e.g., cash, inventory) or intangible (e.g., prepaid expenses, accounts receivable). While tangible assets are easy to see and measure, intangible assets can sometimes be overlooked—but they’re just as important when evaluating your business’ financial health.

Current assets appear on your company’s balance sheet. They indicate its liquidity and reflect the ability to cover short-term obligations and expenses.

Characteristics of current assets

All current assets share some common traits that make them essential for your business:

• Short-term nature: Current assets are meant to be converted into cash within a fiscal year or operating cycle. These assets are not held for the long haul—they’re specifically intended to support your short-term operational needs.
• High liquidity: Liquidity is a defining trait of current assets. They can be quickly converted into cash, which is crucial for meeting immediate financial obligations like paying suppliers, covering payroll or addressing unexpected expenses.
• Direct role in daily operations: Current assets play a hands-on role in your business’ day-to-day activities. Whether it’s inventory that you sell to customers, cash you use to pay bills or payments you’re waiting to receive, these assets are the foundation of your operational success.

Your current assets offer a clear picture of your business’s short-term financial health. When you have enough of them, you can easily cover immediate obligations, keep operations running smoothly, and steer clear of cash flow issues.

Current assets vs. non-current assets

Assets are usually divided into two categories: current assets and non-current (or fixed) assets. Current assets are short-term resources expected to be converted into cash within a year, while non-current assets are held for the long term.

Examples of long-term assets include equipment, property or vehicles that your business holds onto for more than a year to help with operations. These assets aren’t as liquid and are usually sold for much less than their original purchase price after years of use.

Examples of current assets

Current assets come in many forms. Cash and inventory are perhaps the most obvious, but many other resources can be considered current assets. 

Let’s break down the most common types and what they mean for your business:

• Cash and cash equivalents: This includes the cash you have on hand (in the till or your business accounts) and any cash equivalents like treasury bills, money market funds and short-term government bonds. Foreign currency holdings also qualify. To count as current assets, you should be able to use them at a moment’s notice.
• Accounts receivable represent the money customers owe you for products or services you’ve already provided. These are listed as current assets on your balance sheet, but only if you expect to collect the payments within a year. Be mindful of overdue payments, though—if the money is never collected, it should be accounted for as a bad debt allowance.
• Inventory includes raw materials, work-in-progress items, and finished goods ready for sale. While it’s considered a short-term asset, it’s not as easy to convert into cash as accounts receivable or cash itself. After all, there’s no certainty that every item will sell within the year.
• Marketable securities are short-term investments that can be quickly converted into cash. They include stocks, bonds, and mutual funds traded on public exchanges. For your business, they provide a way to earn returns on excess funds while keeping money readily available for urgent needs.
• Prepaid expenses are payments you’ve made in advance for goods or services you’ll use in the future—think insurance or office rent. Even though you can’t convert these into cash, they’re still considered current assets because the payment has already been made, freeing up your capital for other priorities.

Knowing how these current assets work gives you a clearer picture of where your money is and how it’s supporting your business day to day.

Calculation of current assets

If you’ve ever looked at your balance sheet, you’ve probably noticed that the total current assets are calculated at the bottom. But what if you wanted to calculate them yourself? 

Don’t worry—it’s easier than you think. Let’s walk through the process.

Formula for total current assets

Calculating total current assets is simple. Just add up all the assets your business can turn into cash within a year.

Here’s how it would look:

Total Current Assets = Cash + Accounts Receivable + Inventory + Marketable Securities + Prepaid Expenses + Other Liquid Assets

This formula includes the most common types of current assets. If your business has other assets that don’t fall into these categories, you can include them under “Other Liquid Assets”.

Example calculation

Imagine your company’s balance sheet shows the following:

• Cash: £15,000
• Accounts Receivable: £25,000
• Inventory: £40,000
• Marketable Securities: £8,000
• Prepaid Expenses: £7,000

To find your total current assets, just add them up. The total comes to £95,000.

Liquidity ratiosusing current assets

Understanding your current assets helps you calculate key financial ratios that show how well your business can handle short-term obligations. These ratios give a quick snapshot of your financial stability without factoring in the sale of fixed assets.

Investors and creditors often rely on these metrics to gauge your company’s financial health and identify potential risks. For you, liquidity ratios are especially important to ensure you can cover immediate expenses like payroll, supplier payments, or loan installments.

Now, let’s break down the most common ratios that use current assets and see how they can help you be prepared for your company’s financial forecast.

Current ratio

The current ratio is perhaps one of the most widely used metrics for assessing your company’s ability to cover short-term obligations. It includes all your immediate assets. 

However, keep in mind that this metric can sometimes overstate liquidity because it includes inventory, which may not always be easy to convert into cash within a fiscal year.

To calculate the current ratio, divide your total current assets by your current liabilities, which are debts due within a year:

Current Ratio = Current Assets / Current Liabilities

Quick ratio

Another important metric is the quick ratio, also known as the acid-test ratio. It provides a more precise measure of liquidity by focusing on your most liquid assets—those that can be converted into cash within 90 days. This includes cash, cash equivalents, marketable securities, and accounts receivable.

Inventory is excluded since its liquidity can vary depending on your business type and market conditions.

To calculate the quick ratio, subtract inventory from your current assets, then divide by your current liabilities:

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Cash ratio

Finally, the cash ratio focuses only on your cash and cash equivalents. It shows whether your business can instantly cover all short-term liabilities without depending on other assets.

To calculate this metric, add up your cash and its equivalents, then divide by your current liabilities: 

Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

Importance of current assets in business operations

Current assets are more than just numbers on your balance sheet—they determine whether you can pay your bills, keep operations running smoothly and seize new opportunities. 

Supporting daily operations

Your business relies on current assets to cover everyday expenses like payroll, rent, utilities, and supplies. Without enough cash or liquid assets, paying employees on time and keeping the lights on can become a challenge.

Moreover, current assets play a crucial role in inventory management. Maintaining the right stock levels ensures you can meet customer demand without delays. If you don’t have enough inventory, you risk losing sales and frustrating customers.

Meeting short-term obligations

In addition to keeping daily operations running, current assets ensure your business can meet short-term liabilities. Without sufficient funds, a business may struggle to cover expenses, leading to delays in payments or, in the worst case, missed obligations. 

This can damage your relationships with suppliers and creditors, potentially leading to higher costs or even disruptions in your supply chain.

Conversely, maintaining strong liquidity can improve your financial reputation, giving you access to better credit terms, lower interest rates and increased funding opportunities when needed.

Strategic decision-making

Current assets also influence business decisions. Understanding your financial position helps you manage cash flow effectively, avoiding overstocking (which ties up capital) or understocking (which leads to lost sales).

A strong current asset position also provides the flexibility to capitalise on growth opportunities. Whether it’s for bulk purchasing at a discount, a new marketing campaign or investment in expansion, having assets that can be readily converted into cash allows you to act quickly without jeopardising your day-to-day operations.

Conclusion

Gaining a clear understanding of what are current assets is key to keeping your business financially healthy. These assets, like money on hand, accounts receivable and inventory, help cover daily expenses and keep operations running smoothly. 

Unlike long-term investments, which are tied up for more than one year, current assets are liquid investments that your company expects to convert into cash quickly.

By regularly tracking your current assets, you’ll know if you have enough to cover short-term obligations, pay suppliers on time and invest in growth. Plus, keeping an eye on financial ratios can help you spot financial issues before they become serious problems.

Frequently Asked Questions

How many revenue streams should I have?

There’s no set rule for how many revenue streams a business should have. You can succeed with just one, but diversifying increases your chances of growth and resilience.

How do I calculate a revenue stream?

Calculating a revenue stream is simple—it’s the total earnings generated from a specific product, service or source over a given period. Just make sure you’ve recorded all sales accurately.

Is social media a revenue stream?

Social media itself isn’t a revenue stream, but it can be a powerful tool to drive sales. Platforms like Instagram and Facebook can help you generate revenue through selling products and services, affiliate marketing, sponsored content, subscriptions or memberships, and ad placements.