A current asset is an asset the business expects to turn into cash, sell or consume within twelve months of the reporting date. Cash, bank balances, inventory and trade receivables (debtors) are the typical examples. On the balance sheet, current assets are listed separately from non-current assets.
What it means
The twelve-month test divides assets by liquidity. Current assets are the working resources a business cycles through in normal trading - it buys stock, sells it, collects cash, and repeats. They are the source of the cash a business uses to pay its short-term obligations, including the payroll due each period.
Where it fits in
The bank balance net pay is drawn from is a current asset, as are any prepaid employment costs and short-term employee loans the business expects to recover within the year. Having enough current assets to cover the wage bill is a basic test of solvency.
Key rules
- Realised, sold or consumed within twelve months.
- Includes cash, inventory, debtors and prepayments.
- Listed separately from non-current assets on the balance sheet.
- Current assets less current liabilities is the working capital buffer.
