A company has various current assets on its balance sheet. Current assets include cash in hand and cash at bank, accounts receivables, inventory, prepaid expenses and short term investments.

In order to calculate total current assets it is important to understand different types of current assets.

Different Types of Current Assets

Cash in Hand and Cash at Bank

Cash represents the amount of money that is readily available with the company. Cash is frequently used for daily business requirements and for payment to creditors for purchase of raw material. Cash at bank can also be used for investment purposes.

Accounts Receivables

A company may extend credit period to its customers for making payments in respect of sales made to them. A company will have to record the amount of sales in its books of accounts. Any amount of credit sales would be treated as accounts receivables. Since credit is extended by the company for a short period of time, accounts receivables are treated as current assets. It is one of the major components of current assets.

Inventory

Inventory is generally found in manufacturing companies. A company’s inventory includes raw material, work in progress and finished goods.

Short Term Investments

A company may have idle funds for a limited period of time. In order to earn some extra income, a company may decide to invest the amount of idle funds in short term investments. Such investments help a company in earning extra interest income. Since short term investments have a maturity period of less than one year; such investments are included in the amount of total current assets of the company.

Prepaid Expenses

Another component of current assets is the amount of any expenses paid in advance by the company. A company may pay certain expenses in advance for a period other than the current period (such as rent and insurance premium). Prepaid expenses are treated as current assets because benefits associated with such expenses are yet to be realized by the company.

Calculation of total current assets is not a very complex process. Value of total current assets can be derived by simply adding the value of different types of current assets. Information on the type and amount of current assets is available in the balance sheet of a company. Let us understand the process of calculating total current assets of a company with the help of following example:

How To Calculate Total Current Assets

ABC Company has following figures on the asset side of its balance sheet:

Cash in Hand: $ 5,000, Cash at Bank: $ 18,000, Inventory: $ 75,000, Accounts Receivables: $ 1, 50,000, Short term Investments: $ 35,000, Plant: 2, 00,000 and Land: 1, 50,000.

Company’s total current assets would be a sum of the figures of different type of current assets mentioned above, that is,
$ 5,000 + $ 18,000 + $ 75,000 + $ 1, 50,000 + $ 35,000 = $ 2, 83,000. Plant and land figures are not included in the calculation of current assets, as both of these items fall under the category of fixed assets.

Further it is not necessary that a company may have all the types of current assets (as mentioned above) in its balance sheet. For Instance, a company may not have inventory in its balance sheet in case it is engaged in providing consulting services only. Similarly a company may not have accounts receivables, in case goods are sold only on cash basis by the company.