Q.Explain two factors affecting the requirement of working capital.
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Current Assets Definition
Let’s start with a simple picture. Imagine you run a small shop that sells cold drinks. You have a cash box with some money, a fridge full of bottles you plan to sell this week, and a few customers who promised to pay you next week. These are things that will either turn into cash or be used up within a short time — usually within a year.
That’s the core idea: current assets are resources a business expects to convert into cash, sell, or consume within one operating cycle (typically one year). They are the “short-term” stuff that keeps the business running day to day.
The precise definition
Current Assets = Cash and other assets that are reasonably expected to be realised in cash, sold, or consumed within one year (or the normal operating cycle, whichever is longer).
The “operating cycle” is the time it takes to buy inventory, sell it, and collect the cash. For most businesses, this is less than a year, so the one-year rule is the standard.
What counts as a current asset?
The main categories are:
| Asset | What it is |
|---|---|
| Cash and cash equivalents | Physical cash, bank balances, short-term investments (like 3-month treasury bills) |
| Accounts receivable | Money customers owe you from credit sales |
| Inventory | Goods held for sale (raw materials, work-in-progress, finished goods) |
| Prepaid expenses | Payments made in advance (e.g., rent paid for next 6 months) |
| Short-term investments | Stocks or bonds the business plans to sell within a year |
| Marketable securities | Easily sold financial instruments (e.g., shares of another company) |
The key test is liquidity — how quickly can this asset be turned into cash? Current assets are the most liquid part of a balance sheet.
Why does this matter?
Current assets are used to calculate working capital and the current ratio — two critical measures of a company’s short-term financial health.
- Working capital = Current assets − Current liabilities Positive working capital means the business can pay its short-term debts.
- Current ratio = Current assets ÷ Current liabilities …
Working capital needs depend on the nature of business and the operating cycle. …
Nature of business and length of operating cycle.
Factors affecting the requirement of working capital:
- Nature of business — a trading or service concern needs little working capital, while a manufacturing concern needs much more (raw material, work-in-progress, finished goods). …
- CBSE 2026Set ANNUAL1 markMCQQ.Which one of the following items is not included in current assets? A) Stock B) Debtor C) Goodwill D) Bills receivable
›Reveal solutionSolution
Goodwill is an intangible fixed asset, not a current asset, so the answer is C) Goodwill.
Current assets are assets that are expected to be converted into cash or cash equivalents within a short period, usually one year. Checking each option:
- Stock (A) — inventory held for sale, convertible to cash within a year: current asset.
- Debtor (B) — amount receivable from customers shortly: current asset.
- Bills receivable (D) — a short-term instrument due within a year: current asset. …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: _______ assets are those which are converted into cash or cash equivalents within one year. (Current/Fixed)
›Reveal solutionSolution
Assets convertible into cash within one year are Current assets, so that fills the blank.
In financial management, current assets are short-term assets expected to be converted into cash or cash equivalents within a period of one year or one operating cycle. Examples include inventory (stock), debtors, bills receivable, and cash itself. They are distinguished from fixed assets, which are held for long-term us …
- CBSE 2025Set MARCH1 markMCQQ.Assets which are expected to get converted into cash within a period of one year are called __________.(a) fixed assets(b) current assets(c) tangible assets(d) intangible assets
›Reveal solutionSolution
Assets expected to be converted into cash within one year are (b) Current assets.
In Kerala Plus Two Financial Management, assets are classified by how quickly they turn into cash:
- (a) Fixed assets — held for long-term use in the business (land, building, machinery); not meant to be converted to cash within a year.
- (b) Current assets — expected to be converted into cash within one year or one operating cycle: cash in hand/at bank, debtors, bills receivable, inventory (stock), short-term marketable securities, prepaid expenses. Correct. …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is a current asset?(a) Building(b) Cash in hand(c) Machinery(d) Furniture
›Reveal solutionSolution
The correct answer is (b) Cash in hand, which is a current asset.
…
- CBSE 2025Set ANNUAL1 markMCQQ.Current assets is - A) Furniture B) Machine C) Debtor D) Building
›Reveal solutionSolution
A debtor is a current asset because it is expected to be realised in cash within one year.
Current assets are held for a short period and are meant to be converted into cash within one operating cycle or a year — cash, debtors, stock and bills receivable. Debtors (money owed by customers) will be collected shortly, so they are current asset …
- CBSE 2023Set ANNUAL1 markMCQQ.Assets of relatively permanent nature used in the operation of business are known as _____.(1) Liabilities(2) Current Assets(3) Fixed Assets(4) Current liabilities. Choose the correct option :(a)(4) only(b)(3) only(c)(1) and(2) only(d) None of these
›Reveal solutionSolution
Assets of a relatively permanent nature, used in business operations over the long term, are known as Fixed Assets.
Business assets are broadly classified by how long they stay in a particular form:
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Fixed assets are acquired for use in business operations over a long period — such as land and buildings, plant and machinery, furniture and vehicles — and are not meant to be sold in the normal course of business. They support production/operations rather than being converted to cash in the short run, which is why they are described as being of a "relatively permanent nature."
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Current assets, in contrast, are assets that are expected to be converted into cash, sold, or consumed within the normal operating cycle (usually one year) — such as cash, debtors, stock/inventory and short-term investments. They keep rotating through the business cycle rather than staying in one form for long.
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- CBSE 2022Set MARCH1 markQ.Why depreciation is not charged on the assets in which working capital is invested?
›Reveal solutionSolution
Depreciation is a fall in value of fixed assets from long use; working capital sits in current assets that do not wear out, so they are not depreciated.
- Working capital is invested in current assets — cash, stock, debtors, bills receivable — which keep circulating and are turned back into cash within a short period (usually a year).
- Depreciation is charged only on fixed assets (plant, machinery, building) because they are used over many years and lose value through wear, tear and obsolescence. …
- CBSE 2022Set MARCH1 markMCQQ.Which of the following is a Fixed asset?(a) Cash in hand(b) Debtors(c) Building(d) Bills receivable
›Reveal solutionSolution
Correct option: (c) Building — it is a long-term (fixed) asset.
…
- CBSE 2022Set ANNUAL1 markMCQQ.Current assets are those assets which get converted into cash(a) within six months(b) within one year(c) between one year and three years(d) between three years and five years
›Reveal solutionSolution
Current assets get converted into cash within one year.
Current assets are assets held by a business for a short duration, meant to be converted into cash, sold, or consumed during the normal course of business operations. The standard accounting definition used in Indian company financial statements classifies an asset as 'current' if it is expected to be realised in cash, sold, or consumed within twelve months (one year) from the reporting date, or within the business's normal operating cycle if that is longer. Examples include cash and bank balances, debtors/receivables, inventory (stock), and short-term …
- CBSE 2020Set 67/2/11 markMCQQ.Which of the following is not a subhead under the Current Assets ? (A) Cash and Cash Equivalents (B) Trademarks (C) Short-term Loans and Advances (D) Inventories
›Reveal solutionSolution
Trademarks are intangible fixed assets, not current assets, because they provide long-term benefits and are not meant for conversion into cash within a year.
Current assets represent those resources a business expects to convert into cash, sell, or consume within one operating cycle—typically twelve months or the accounting year, whichever is longer. The classification rests on liquidity and the intention behind holding the asset. When you prepare a balance sheet under Schedule III of the Companies Act, current assets appear as a distinct major head with several standardised subheads beneath it.
The NCERT textbook on Accountancy identifies the principal subheads under Current Assets as follows:
- Inventories – raw materials, work-in-progress, finished goods, and stores that the business holds for sale or production.
- Trade Receivables – amounts customers owe for goods sold or services rendered on credit.
- Cash and Cash Equivalents – currency in hand, balances with banks, and highly liquid investments with original maturities of three months or less.
- Short-term Loans and Advances – loans given to employees, advances to suppliers, and prepaid expenses recoverable within a year.
- Other Current Assets – a residual category for items like accrued income or tax refunds due.
Each of these subheads captures assets that will either be realised in cash or consumed in the normal course of business within the operating cycle.
NoteThe operating cycle concept is crucial: for a manufacturing firm with a long production process, even if the cycle exceeds twelve months, assets tied to that cycle still qualify as current. …
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