Definition: A current asset, also called a short-term asset, is a resource expected to be used to benefit a company within a year or the current accounting period. Hence, these resources are short-term in nature and will be sold, collected, or used up in a 12-month period.
What Does Current Asset Mean?
The most common current assets are cash, accounts receivable, inventory, and prepaid expenses. These are all resources that a company can use in the current period to purchase new assets, pay debts and expenses, or convert into cash.
The first three items in this list are pretty obvious, but prepaid expenses can a little difficult to understand at first. These items consist of expenses that have already been paid. In a sense, it’s a receivable for services. For example, prepaid rent is a current asset. This is rent that was paid for but not used yet. When a tenant pays the landlord a month’s rent in advance, the landlord owes the tenant a month’s worth of rent. This is a resource is an asset and the tenant records it like a receivable in this sense.
One characteristic that all short-term assets have is that they are fairly liquid. Cash being the most liquid of all assets is readily tradable for other resources. Other current assets, like accounts receivable and inventory, are readily converted into cash and can be used to pay for operational expenses. These resources are extremely liquid compared with long-term assets like building and vehicles. It’s much easier for a company to convert inventory into cash compared with a building.
Since the balance sheet reports assets in order of liquidity, current assets are reported on the first section followed by a separate section for the noncurrent assets. The separation of current and noncurrent assets allows external users to analyze the liquidity of the company as well as how efficiently it uses its resources.