Introduction to Current Asset
You can always find a current asset as an item on the balance sheet of an entity. A current asset can be cash, a cash equivalent (an investment with high liquidity), or anything that one can turn into cash in a year. If a firm possesses a cash conversion cycle (Also see Different Types of Transaction Cycles) that lasts for more than a year, it can still classify an asset as current (Also see What Are Assets and How to Classify Them?), provided that the firm can turn it into cash within the cash conversion cycle. Some current assets include cash, which consists of the currency for any foreign country, prepaid expenses, inventory, accounts receivable, as well as investments, but this is only for investments which can be liquidated quickly.
Typically, people would display these items in the order of how liquid they are on the balance sheet. This indicates that one will present the item with the highest liquidity first.
Creditors are keen on knowing the ratio of current liabilities to current assets, as this illustrates the liquidity of an organization in the short run. Basically, having more current assets considerably compared to liabilities shows that a firm will most probably have the ability to fulfil its obligations in a short period. One can use a few financial ratios in this type of analysis which is related to liquidity. Some examples of those ratios comprise of the quick ratio, cash ratio, as well as current ratio.
A major concern that you have to take into account if you want to use current assets to measure the liquidity of your business is that some accounts in this group do not have high liquidity. Specifically, you may find converting your inventory into cash difficult. Comparably, you may have some invoices that are exceedingly overdue in your accounts receivable number, although you should have a counterbalancing amount within your allowance for doubtful accounts (which acts as a contra account in this case) to show the amounts that you do not have any expectation in collecting them. Hence, you should always inspect the contents of your current assets so that you can see the actual liquidity of your company.
The relationship between current asset and the liquidity of a business has a significant impact on its finances. Hence, if you wish to have peace of mind in your firm’s accounting matters like this, it would be helpful if you engage an accounting firm in Johor Bahru to help you manage such tasks.