In the world of business and economics, current assets are the vital pulse that keeps companies alive and gives them the ability to continue their path towards success and development. It is worth noting that understanding the dynamics of these assets is not limited only to financial professionals but is essential for everyone seeking to understand the different aspects of business management and financial planning. So in this article, we will dive into the world of these assets, exploring their importance, types, and pivotal role in enhancing companies’ ability to achieve their goals and exploit growth opportunities effectively and efficiently. Are you ready to discover the secrets of this vital aspect of the world of economics? So let’s start this exciting journey together.
What are current assets?
They are the personal property of any institution, but they are characterized by being short-term, that is, assets that do not last more than a year, and they are also characterized by the ease of converting them into cash. This is what makes it occupy an important place in the financial reports of institutions.
In financial reports, current assets are ranked according to their degree of liquidity, meaning that an asset that can be converted into cash quickly is listed first. This reflects the institution’s ability to cover its short-term financial obligations and is an important indicator of its financial health.
The importance of current assets
These assets play a pivotal role in the stability and strength of the financial position of any facility, as their importance is evident as follows:
- Ease of conversion into cash: It serves as a quick source of cash that can be relied upon when facing financial crises.
- Ability to repay future debts: Current assets play an essential role in assessing an organization’s ability to repay its future debts.
- Liquidity Index: It is a vital measure of liquidity, as calculating its sum helps estimate the company’s ability to cover its short-term obligations.
- Determining the financial situation enables management to evaluate the overall financial situation of the organization, as understanding its quality helps in making informed decisions.
- Potential risk assessment helps identify potential risks that the organization may face.
- Future debt repayment capacity: By monitoring its size, it is possible to predict the company’s ability to meet its financial obligations at the specified times.
Types of current assets
There are several main types of current assets, which include the following:
Money and the like
- Liquid Money: This is the cash held by an organization for its immediate use.
- Current accounts in banks: money deposited in bank accounts that can be withdrawn at any time.
- Treasury bills are short-term securities issued by governments that are close to cash.
- Savings Accounts: Money deposited in interest-bearing, easily accessible bank accounts.
- Money Transfers: bank transfers and funds transferred between accounts that can be converted into cash quickly.
Short-term investments
These investments are those that can be liquidated and converted into cash within one year, and this category includes:
- Stocks: ownership shares in companies that can be sold on stock exchanges.
- Government bonds: debts owed by governments that can be sold in financial markets.
- Certificates of Deposit: Financial deposits issued by banks with a short maturity period and easily redeemable.
Current accounts receivable
These accounts represent money owed to the organization from customers for goods and services delivered, which are short-term debts that the organization expects to collect within a short period.
Inventory
Inventory includes assets that the organization owns and is waiting to sell. It is worth noting that inventory can be divided into the following:
- Raw materials: materials that have not yet been used in production.
- Products in progress: goods that are still in the manufacturing process.
- Finished product: goods ready for sale.
It is worth noting that inventory is an important current asset, especially in institutions with large sales, as it is converted into cash upon sale.
Prepaid expenses
They include expenses paid by the organization in advance to obtain products or services in the future. Although these assets are not measured based on their liquidity, they are considered current assets because they represent deferred expenses. Examples of these expenses paid in advance include the following:
- Prepaid Taxes: Amounts paid for taxes before they are due.
- Prepaid insurance: amounts paid for insurance coverage for a future period.
Examples of current assets
Here are some common examples of this type of asset:
- Cash, bank, and postal transfers.
- Money market accounts.
- Stocks, bonds.
- Unpaid receipts (receivables).
- Frequent recalls of products.
- investment funds.
- Insurance payments.
- Rent is paid in advance.
- Semi-annual fees.
How do I calculate my current assets?
To calculate the current assets on the institution’s balance sheet, several organized steps must be followed, which are as follows:
calculate Cash
The liquid cash available to the institution includes petty cash in addition to balances in current accounts. To calculate cash, the following formula can be used:
- Cash = liquid money + petty cash + current accounts.
Example
If the liquid cash is 100 thousand riyals, the current account balance is 200 thousand riyals, and the miscellaneous expenses are 80 thousand riyals, then the total cash is:
- 100,000 + 200,000 + 80,000 = 380,000 riyals.
Calculate total short-term investments.
These investments include assets that can be converted into cash within a short period, such as stocks and certificates of deposit. To be able to calculate the total short-term investments, we collect all of these investments.
Example
If the institution owns 60 thousand riyals of shares and 40 thousand riyals of certificates of deposit, the total short-term investments will be:
- 60,000 + 40,000 = 100,000 riyals.
Calculate the total accounts receivable (current accounts receivable).
Accounts receivable include all receivables from customers that have not yet been collected. To calculate the total accounts receivable, we collect all the organization’s receivables from customers.
Calculate the total inventory.
Inventory at the end of the year can be calculated using the following equation:
- Ending inventory value = inventory value at the beginning of the year + net purchases + cost of goods sold.
Example
If the beginning inventory was 200 thousand riyals, net purchases for this year were 300 thousand riyals, and the cost of goods sold was 150 thousand riyals, then the value of the ending inventory would be:
- 200,000 + (300,000 minus 150,000) = 350,000 riyals.
Calculate prepaid expenses and other assets.
Prepaid expenses include any amounts paid in advance to obtain services or products in the future. It is worth noting that all these expenses and other assets that fall under current assets must be collected.
Calculate the total current assets.
After calculating all the previous items, the following equation can be used to calculate the total assets:
- Total Assets = Cash + Cash Equivalents + Total Short-Term Investments + Accounts Receivable + Inventory + Prepaid Expenses + Other Assets.
What is the difference between current assets and current liabilities?
The difference between current assets and current liabilities can be explained as follows:
| The difference | Assets | Current Liabilities |
| the definition | Assets that are expected to be converted into cash within one financial period (usually one year). | Liabilities that must be paid within one financial period (usually one year). |
| Examples | · Tradable securities.
· cash. · Inventory. · Accounts receivable. |
· Short-term debt.
· Short-term loans. · Accrued expenses. · Creditors (suppliers). |
| the purpose | Covering daily cash needs and managing ongoing operations. | Financial liabilities that must be repaid in the near future. |
| Liquidity | High. | Requires liquidity to be repaid. |
| Impact on liquidity | Increases available liquidity. | Reduces available liquidity. |
What is the difference between current and non-current assets?
The difference between non-current and current assets can be known through the following table:
| The difference | Assets | Non-current assets (fixed) |
| the definition | Property that is easily converted into cash and does not last more than one year (short-term). | Property that an organization uses to increase income, uses for the production process, cannot be easily converted into cash, and lasts for many years (long-term). |
| Examples | · Cash.
· Inventory. · Accounts receivable. · Money bills. · Certificates of deposit. · Prepaid insurances. |
· Lands.
· Buildings. · The machines and the equipment. · Furniture. |
| Liquidity | High. | Low. |
| Duration of use | Short-term (less than a year). | Long-term (several years). |
| the goal | Support the daily operations of the organization. | Supporting the infrastructure and production capacity of the institution. |
| Ability to convert into cash | Easy and fast. | Difficult and slow. |
Current assets form
If you want to download the current asset form, simply click here.
How to add a fixed asset to the Qoyod website
To add a fixed asset to the “Qoyod” website, you must follow organized steps to ensure that all the required data is entered correctly, so here is a detailed explanation of these steps:
- Accessing the fixed assets page: From the main menu on the “Qoyod” website, choose “Fixed Assets.” A drop-down menu will open for you.
- Click on “Fixed Assets” from this menu to access the fixed asset management page.
- Add a new asset: On the Fixed Assets page, click the “Add Asset” button to start the process of adding a new asset.
Fill in the basic data for the asset.
- Arabic Name: Enter the Arabic name of the original.
- English: Enter the English name of the original.
- Reference number: You can type a unique reference number for the asset or generate an automatic reference number.
- Description: Enter a detailed description of the asset to explain what it is and its uses.
- Unit of measurement: Choose the appropriate unit of measurement for the asset (such as kilogram, meter, etc.).
- Tax: Specify the tax rate applied to the asset, if any.
- Asset Value: Enter the financial value of the asset.
- Scrap: If the asset has a salvage value after the end of its useful life, enter this value.
Determine the asset classification.
Choose the appropriate classification for the asset from the available list. It is worth noting that the classification helps you link the asset to the appropriate accounting accounts automatically if the required classification does not exist.
- You can add a new category briefly and fill in its data as needed.
Barcode data entry (optional)
- If the asset has a barcode, tap the barcode icon.
- Choose Manual Entry if you have the barcode typed, and enter it in the designated field.
- Add an image of the asset (optional): Click the “Choose Image” option to upload an illustration of the asset from your computer.
Saving data
- After filling out all the required data, click “Save” to save the new asset.
- If you want to add another asset after saving this one, you can click “Save and Create New.”
After completing these steps, the new asset will be displayed on the Fixed Assets page, where you can review and update the data when needed. It is worth noting that this procedure ensures that fixed assets are organized and managed effectively within the “Qoyod” system.
Conclusion
Current assets constitute a vital part of the financial stability and commercial success of any company, and it is worth noting that by understanding and managing these assets effectively, companies can improve their cash flows, reduce financial risks, and enhance their ability to invest in future opportunities. We must not forget that monitoring and analyzing these assets remains an essential step towards achieving sustainable growth and excellence in competitive markets. Therefore, financial managers and business owners should give these assets sufficient attention to ensure optimal performance and be prepared to face potential financial challenges.
It is worth noting that the Qoyod platform, which is the best accounting program in the Kingdom of Saudi Arabia, helps you add fixed assets through it, and it also provides electronic invoice systems as well as point-of-sale systems, warehouses, customers, etc.
Dear reader, after knowing what current assets are, try Qoyod now for free for 14 days. It is an accounting program that impresses everyone who uses it with results they never dreamed of.
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