What's Considered a Current Asset?

As an entrepreneur, cash is necessary to fund your operations. Whether you need new equipment for your business or a larger office space, you'll have to raise funds to pay for these investments.

Funding can come from a loan, investor, business line of credit, or you can pay cash. Cash and short-term assets that can be quickly converted to cash are called current assets. They're also liquid assets — when an asset is liquid, it can be converted to cash in a short timeframe.

Below is a list of current assets that are often listed on a company's balance sheet.

These are assets that will turn into cash within a year from the date displayed at the top of the balance sheet. A balance sheet is a financial statement that shows a business' assets and how they're financed, through debt or equity.

The balance sheet reports on an accounting period, which is typically a 12-month timeframe. Current assets can be found at the top of a company's balance sheet and they're listed in order of liquidity.

Next, we'll take a deeper look into different types of assets and learn why they're considered current assets.

Is cash an asset?

Cash is the primary current asset and it's listed first on the balance sheet because it's the most liquid. It includes a business' checking account that's used to pay expenses and receive payments from customers.

It also includes imprest accounts which are used for petty cash transactions. This cash is used for small payments like donuts and coffee for a morning meeting, reimbursing an employee for a minor business-related expense, or purchasing a low-cost supply, like paperclips or stamps.

Is accounts receivable an asset?

Accounts receivable is the money customers owe the seller or business. Since most customer payments are converted to cash within a year, it's listed as a current asset. For example, a furniture company sells a couch to a customer and with the agreement a

If a good or a service takes more than a year to convert to cash, it would be considered a long-term asset, and wouldn't be reported under current assets. Instead, it would be classified as a non-current asset.

Is inventory a current asset?

Your business' unsold merchandise is known as inventory. It's a current asset because the merchandise is often sold within a year. Inventory is a current asset that needs to be monitored closely.

If you have too much inventory, your items could become obsolete, they could expire or spoil (e.g., food items), and you'll spend too much money on manufacturing and storing the merchandise. And if you're short on inventory, you'll lose sales and likely have frustrated customers who can't purchase your product because it's out of stock.

Is prepaid insurance an asset?

Prepaid insurance is recorded as a current asset on the balance sheet. It's the term used to describe advance payments for insurance coverage.

Insurance premiums are often paid before the period covered by the payment. And the entire amount is typically paid off within a year.

Is prepaid rent an asset?

If you're making a rent payment before the period it's due, this is considered prepaid rent. It's a current asset that's reported on the balance sheet.

The payment is considered a current asset until your business begins using the office space or facility in the period the payment was for. For example, a business pays its office rent for November on October 30th. Once they begin using the office space on November 1st, the payment would then be reported as an expense.

Non-current assets are also known as fixed assets. Since they're long-term investments, they can't be easily turned into cash within a year.

If you need a quick way to remember what's considered non-current, think property, plant, equipment, and intangible assets. Assets that fall within these four categories often cannot be sold within a year and turned into cash quickly.

Is equipment a current asset?

Equipment isn't considered a current asset because it's a fixed, illiquid asset. Examples of equipment include machinery used for operations and office equipment (e.g., fax machines, printers, copiers, and computers).

Even if you plan to sell a piece of equipment within a year of purchasing, it's still considered a long-term, non-current asset. However, if a company's core business is buying, selling, and distributing equipment, like printers, then the printers would be considered inventory which is a current asset.

Understanding what types of assets you have will give you a clearer idea of which ones can be converted to cash to fund your business endeavors.

To learn more about entrepreneurship, read about how to start a business next.