Need to calculate total current assets? Need to impress investors, banks or creditors? Make sure you add-up everything that can potentially give you quick and easy cash-on-hand. To help, here’s a quick tutorial on what all to include when counting up your worth:
Assets are defined as those things that a company owns and have value. Assets might include physical property like plants, cars, trucks, machines, and Inventory, but it may also include intangible things (things that do not exist in a physical sense, but which nevertheless have monetary value), such as trademarks and patents. Cash, in and of itself, is also considered an Asset, as are Accounts Receivable (the money due in from customers), securities and investments and any other item of value.
Specifically, businesses use Assets, as shown on a Balance Sheet, in their day-to-day operations for earning money. This use typically means either a business can sell these Assets, or it can use them to make products for sale, or to render services. As in the illustration, Assets can be divided into “Current” and “Non-Current” Assets. The difference is how “Liquid” or readily-available the Asset is to use. For example, selling a security or investment for Cash makes the Asset “Liquid” and “Current.” Non-Current usually means Physical Assets such as buildings or equipment, which has value, maybe even considerable value, but is difficult to sell or turn into ready Cash.
FYI: Many businesses have non-monetary Assets which include Intangible Assets such as trademarks, patents, goodwill, etc. which are difficult to set a specific value and are definitely part of the overall value of a company, but unfortunately, these cannot be transferred into ready Cash. Any item having no monetary value is irrelevant to the financial state of a company at a point-in-time and is therefore not taken into consideration on a Balance Sheet. Normally, if a non-monetary thing has a potential effect on items on a Balance Sheet, then this information is listed in the footnotes or documentation that accompanies the Balance Sheet or other Financial Statements.
Generally, we list Assets in order of Liquidity, or how quickly they will be converted into Cash. Therefore, a breakdown of Assets into the categories of Current Assets (those that can be converted to Cash quickly) and Non-Current or Long-Term Assets (which take more time to convert to Cash) is necessary to place them on Balance Sheet at proper place. Current Assets and Non-Current or Long-Term Assets are, typically, subtotaled in the Asset list.
As you can see in following illustration:
Current Assets are things a company expects to convert to Cash within one period. Normally, this period is one year. A good example of Current Assets is Inventory. Most companies expect to sell their Inventory for Cash within one year. However, there may be situations where a company stocks nonperishable inventories as a part of their business strategy; in expectation that the Inventory will maintain or increase in value in the future.
Non-Current Assets are things a company does not expect to convert to Cash within one year or that would take longer than one year to sell. This type of Asset includes Fixed Assets, and the Assets used to operate the business which are not available for sale, such as cars, office furniture, buildings and other property.