Q.Define current assets? Give four examples of such assets.

Current assets are those assets that are either held for conversion into cash or for use in the business within a short period — usually one accounting year. They are also called "short-term assets" because they are expected to be realised, sold, or consumed in the normal operating cycle of the business.

Examples of current assets include:

• Cash and cash equivalents (like bank balances)
• Debtors (accounts receivable, i.e., amounts due from customers)
• Inventories (stock of raw materials, work-in-progress, and finished goods)
• Prepaid expenses (payments made in advance for services or goods to be received)

Apart from investing in fixed assets, every business needs to invest in current assets to keep its day-to-day operations running smoothly. Current assets are those assets that are expected to be converted into cash or cash equivalents within one year. They are usually more liquid than fixed assets but contribute less to profit, so a firm has to strike a balance between liquidity and profitability: too few current assets and it may struggle to meet its payment obligations; too many and its funds earn little return.

An asset is regarded as more liquid if it can be turned into cash quickly and without loss of value, and current assets are usually listed in order of liquidity -- cash in hand and at bank, marketable securities, bills receivable, debtors, finished-goods inventory, work in progress, raw materials, and prepaid expenses. Four common examples explain the idea.

Cash in hand and cash at bank -- the most liquid current asset of all, along with very short-term marketable securities that can be turned into a known amount of cash almost immediately. This is the cash the business uses to meet its everyday payments.

Debtors (accounts receivable) -- when goods are sold on credit, the amount due from customers becomes a debtor. It is a current asset because the firm expects to collect it within the short credit period it allows.

Inventories (stock) -- raw materials, work in progress, and finished goods. They are current assets because they will either be sold (finished goods) or turned into goods that will be sold (raw materials and work in progress) within the operating cycle.

Prepaid expenses -- payments made in advance for a benefit to be received within the coming year, such as an insurance premium paid for the full year. The benefit is consumed in the short term, so the advance is treated as a current asset.