How Currents Work

Currents, as the assets of a company, are expected to be used as a currency; in other terms, they are expected to be used, consumed, or utilized through business operations within a year. Common forms of currents are cash and stock inventory/shares. Accounts receivable, cash equivalents, and liquid assets are also forms of currents. Currents are also called "current assets" or "current accounts".

Current assets complement their counterpart, long-term assets or the assets that cannot be turned into cash in the duration of a year. With or without the assistance of the long-term assets, current assets provide help to businesses since they can be used as funds in daily business operations; they can also be used as payment for ongoing expenses.

Example of Currents

As stated earlier, currents include cash and any cash alternatives, such as liquid assets. Typically, you can use any asset that can be used as a form of currency, as long as it is an asset permitted to be feasibly turned into cash within a year (or long-term assets). Current assets include stocks, inventory, marketable securities, and other financial assets; essentially, any asset that can be converted to cash within a year is a current.

Significance of Currents

Current assets are what businessmen would call "dollar values," or in layman's terms, things that can be easily converted into money in a brief period of time and hold a financial value. Current assets are significant to business entities because they can use currents as a mode of payment for bills and/or loans.

Current assets also represent the business' liquid assets. Creditors and investors can observe the current assets of a company, business, or economic entity to further assess and decide whether to be involved in its operations. Current assets can be used to calculate their "liquidity ratios," which are the financial means that a debtor has to pay present debts or credits without increasing external capital.

Types of Currents

Current assets are simply the summary of all the assets that are "liquid" or assets that are ready to be converted to cash. Since currents are liquid assets as a whole, the formula for them is: Current Assets = Cash + Cash Equivalents + Inventory + Accounts Receivable + Marketable Securities + Prepaid Expenses + Other Liquid Assets. To further understand the formula shown, you must understand some of the more complicated terms in it.

Marketable Securities and Accounts Receivable - Marketable securities are assets that can be turned into cash quickly, thus a current; they can be bought or sold on a stock exchange. Accounts receivable are similar to marketable securities. Accounts receivable are assets, commonly in the form of money or services, that have not been paid by the customer(s). They are considered currents as long as they are payable within the duration of a year.

Prepaid Expenses - These are advance payments made by a business for products or services that are to be received in the future. Though prepaid expenses frequently cannot be converted into cash, they are considered currents since they are payments that have already transacted. Such examples are payments to insurance companies or loans.

Currents vs. Long-Term Assets

People frequently confuse currents and long-term assets. The most observable difference between them is that currents are assets that can be converted to cash within the time span of a year while long-terms assets can remain on a company's balance sheet for many years. Currents are also frequently used as payments and/or compensations for daily operations and expenses while long-term assets usually are not. Lastly, the majority of the currents are not "tangible assets" or assets that can be physically touched. On the other hand, long-term assets are tangible assets.