Posted by Kindra K.
August 20, 2019
Every business has assets, or so they should. Whether you’re a plumber, HVAC technician, restaurant owner, or the CEO of a large corporation, understanding your currents assets allows you to increase your business’ value, facilitate the running of your business, and generate revenue. Assets are simply something that has value. Whether it’s something tangible like the products you sell or something invisible like copyrighted material, your business’ assets fund the operations of your company.
If you’re a new business owner, or a veteran looking to brush up on your accounting skills, we go over the definition of current assets, how to calculate current assets, different types of current assets, as well as non-current assets, current liabilities, long-term liabilities and more. Continue reading below to discover all there is to know about current assets, or use the provided jump links to navigate to a section that may answer your question on how to calculate current assets.
When it comes to assets, there are two types: current assets and noncurrent assets. Currents assets are business assets that are converted into cash within one year and are listed on your business’ balance sheet. Current assets help fund business operations and are used to pay current expenses, such as rent and utility bills. There are numerous types of current assets, which include cash, cash equivalents, inventory, accounts receivables, marketing securities, and prepaid expenses.
Calculating current assets can be difficult, which is why 56 percent of U.S. Millennials work with a financial professional to help determine their current financial affairs. If you’re more of a do-it-yourself type of person, using an accounting system like QuickBooks Online or QuickBooks Desktop can help streamline your processes and safely record accurate numbers.
Below, you’ll find examples for each type of current asset to determine how they may look on your balance sheet.
Cash and cash equivalents are an easy current asset to calculate, as they can easily be used within one year to pay off short term debt and other liabilities. Cash is also the most liquid asset you can have, as cash is already...cash!
Cash in checking and savings accounts
Cash Equivalent Examples
Money market funds
Short-term government bonds
While marketable securities are a cash equivalent example, they deserve their own section because they are a valuable type of current asset that needs to be considered when filling in your balance sheet. Curious as to the definition of marketable securities? They’re investments that can be changed into cash easily. These securities are traded on a public exchange, such as a stock exchange or bond exchange. Marketable security examples include:
Certificates of deposit
Accounts receivables are the pending payments your customers owe you for the goods or services you’ve provided. For most B2B businesses, the business sends an invoice to their customers, giving them either 30, 60, or 90 days to settle their accounts and make their payment. Accounts receivables are considered a current asset because these pending payments can easily come in as cash through a wire transfer, or can be converted to cash through the form of a check.
If you own a small business that issues invoices, investing in field service management software can help you receive your payments quicker, so you have more liquid assets readily available. If you’re asking yourself, “What is field service management software?”, it’s simply the allocation of offsite resources to better serve customers, which includes features such as issuing invoices, scheduling employees, managing your workforce, and so much more.
Your business’ inventory is an asset that is meant to be sold, typically within a year, which is why it is considered a current asset. And if the inventory isn’t sold to customers by the end of the year, the business can easily liquidate the inventory for cash, even though it’s at a lower cost than what the company originally paid for the items.
For businesses that have perishable inventory, such as food and cosmetics, should be cautious not to overstock in order to avoid losing money. Additionally, using the best HVAC calculation apps allow you to measure exact dimensions for parts will save you money by making informed estimates and stocking your inventory properly.
Inventory is also split into three separate categories: raw materials, work in progress, and finished products.
Raw materials include the materials that are intended to be used to create the finished product.
Work-in-progress refers to goods that are currently in production and are not yet ready to be sold to consumers
Finished products are the goods that are ready to go on the shelf and be sold to customers. This includes the merchandise in retail stores, cooked entrees in a restaurant, or a completed car on the lot at a dealership.
Prepaid expenses refer to all the expenses you’ve paid for already but are underlying assets that have not been used or received. The most common type of prepaid expense for businesses is insurance. Typically, a business will pay for insurance at the beginning of the year, such as general liability insurance, and will charge this expense over the course of the year.
So, if you purchase a $2,400 insurance plan, you will deduct $200 from prepaid expenses on your balance sheet for 12 months. Once the prepaid expense is paid off in its entirety, you will remove it from your balance sheet and report that period as an expense on your income statement.
Current liabilities are - you guessed it - the reverse of current assets, in that they are the debts and obligations a company owes within one year. To pay off debts and obligations, a company’s current assets are used to fund these expenses. Current liabilities are also found on a company’s balance sheet and include short-term debts, accounts payable, accrued liabilities, and other similar types of debt.
Common examples of current liabilities include:
Accounts payable: These are payments due to suppliers for items you need, such as PVC piping for your plumbing service, and come in the form of supplier invoices.
Wages payable: Your employees don’t work for free. Wages payable include the amount of money you owe each employee per pay period.
Payroll taxes payable: Taxes that are withheld from employee pay or for employee compensation is a current liability because it needs to be paid within a year.
Sales tax payable: Sales tax is charged upon customers for each purchase of a good, which the company must pay within a year to the government.
Income taxes payable: Similar to sales tax payable, these include income taxes owed to the government but have not yet been paid.
Short-term loans: Any loans that need to be paid off within a year are a current liability.
Customer deposits: If a customer makes a payment before the completion of a service or purchase of a good, it must be calculated as a current liability.
Ready to learn how to calculate your current assets? The formula for current assets is simple and goes as follows:
Current Assets = Prepaid Expenses + Accounts Receivables + Cash + Cash Equivalents + Inventory + Marketable Securities
Simply put, your current assets are all of your assets added together. Similarly, to calculate your current liabilities, you add all debts and obligations together, such as your accounts payables, wages payable, and short-term debt.
To help put current assets and current liabilities, we’ll use Home Depot as an example. Take a look at the current assets and current liabilities of Home Depot as of February 3, 2019:
Home Depot Current Assets
Cash and Cash Equivalents: $1,778,000
Merchandise Inventories: $13,925,000
Net Receivables: $1,936,000
Other Assets: $890,000
Total Current Assets: $18,529,000
Home Depot Current Liabilities
Accounts Payable: $7,755,000
Short Term Debt: $1,339,000
Accrued Salaries and Related Expenses: $1,506,000
Sales Taxes Payable: $656,000
Deferred Revenue: $1,782,000
Income Taxes Payable: $11,000
Current Installments of Long-Term Debt: $1,056,000
Other Accrued Expenses: $2,611,000
Total Current Liabilities: $16,716,000
To evaluate the current assets of your company, it’s best to compare your current assets to your current liabilities. In the case of Home Depot, they demonstrate they have strong short-term liquidity and can afford to pay off their short-term debts using their current assets because they have more current assets than current liabilities. However, having too many current assets isn't always a good thing.
Let’s say, for example, Home Depot had double the amount of current assets ($37,058,000). In this case, it may show lenders and investors that Home Depot may not be investing profits into money-making projects. There are many ways small businesses can invest their money to grow their company while still having enough liquidity. Investing excess money into high-risk, high-return projects and low-risk, low-return projects will show investors you’re working to grow your business.
Learning how to calculate your current assets and your current liabilities helps you understand the current financial affairs of your company. However, they don’t provide a full understanding of how your company is doing. Instead, investors and lenders evaluate your company using your current assets and liabilities with a few additional formulas. Using these formulas can be tricky, which is why around 47 percent of small businesses used accounting services for bookkeeping in 2018, which includes services for evaluating their assets.
To compare how your current assets and current liabilities stack up against each other, accounting services will use the following formulas:
The current ratio formula tests your company’s financial strength by calculating how much money in assets can be changed into cash in order to settle debts within the time period of a single year. Each industry is different, meaning there are different cash conversion cycles and economic means. However, for most companies, a current ratio around 1.5 is acceptable. If a company’s current ratio is below 1, it means they have negative working capital and could be losing money. Current ratios above 2, on the other hand, show that a company has too much money that isn’t being invested. The current ratio formula goes as follows:
Current Ratio = Current Assets divided by your Current Liabilities
In the case of Home Depot, their current assets totaled $18,529,000, while their current liabilities totaled $16,716,000. Using the above formula, their current ratio is 1.11. Their ratio is relatively low, but still above 1, which is good. However, as you may know just by walking in the store, Home Depot has a ton of inventory, which means they can convert it into cash quickly, as well as accounts receivables, most likely coming from their Home Depot Pro Xtra Accounts. These numbers show Home Depot has enough liquid assets to pay off current debts. However, other businesses who have a similar ratio, but a smaller inventory, may be facing some liquidity issues.
In a balance sheet, the assets are ranked hierarchically based on their liquidity. So, since cash is already in the form of cash, it is the most liquid. The quick ratio formula is similar to the current ratio formula, but instead, it only considers the most liquid assets. So, inventory and prepaid expenses would be excluded to see how many assets a company has to quickly pay off liabilities. The quick ratio formula goes as follows:
Quick Ratio = (Current Assets minus Prepaid Expenses plus Inventory) divided by Current Liabilities
For the quick ratio formula, we’ll stick with our Home Depot Example. While their prepaid expenses aren’t identified, their inventory comes in at $13,925,000. So, using the formula, Home Depot’s quick ratio would look like this:
(18,529,000 - 13,925,000) ÷ 16,716,000 = 0.275
Home Depot’s ratio is 0.275, which shows that they do not have a do not have a ton of cash in the form of liquid assets to pay off any short-term debts.
The net working capital formula is used to determine shareholder’s equity and whether you have enough assets available to pay off all debts, bills, and liabilities due within one year. The net working capital formula goes as follows:
Net Working Capital = Current Assets minus your Current Liabilities
For Home Depot, their Net Working Capital would be $1,813,000 ($18,529,000 - $16,716,000). This means Home Depot has about $1.8 million to pay any bills and day-to-day expenses.
Understanding your current assets will give you a glimpse of your business’s short-term finances. Calculating your current assets will help you understand the financial health of your company, and if your liabilities can be counteracted with assets. Having low percentages, especially below 1, will show you don’t have enough liquidity to pay off any short-term debts. Conversely, having too many assets shows you may not be taking advantage of revenue-generating opportunities.
Not only will a well-balanced current asset ratio demonstrate the financial health of your business, but you may also be able to leverage it as collateral for a loan if you plan to expand your business, buy more property, or purchase expensive machinery.
And if you’re wondering how to calculate the break-even point of your company, your current assets will come in handy. Your breaking-even point is when your sales are exactly covering your expenses. With your current assets and liabilities at hand, you’ll be able to factor in certain types of assets, such as accounts receivables, and certain liabilities, such as taxes payable, into your breaking even formula.
Now that you understand the importance of both your current assets and current liabilities, you should know how they work in tandem on your balance sheet. According to the U.S. Securities and Exchange Commission, a balance sheet provides detailed information on your company’s assets, liabilities, and shareholder’s equity (also known as the net worth). Some of the most costly bookkeeping errors made by small businesses include miscalculations and confusing major purchases with immediate expenses, which is why using an accounting professional or software to regularly update your balance sheet is a good idea.
A balance sheet is usually set up with the company’s assets listed on the left or top, with the company’s liabilities and shareholder’s equity listed on the right or bottom. On the balance sheet, assets are listed based on how quickly they can be converted into cash. So, current assets are typically listed towards the top of the balance sheet, because they’re typically intended to be converted into cash in a year’s time, and are then followed by noncurrent assets and fixed assets. The Small Business Administration created a balance sheet template you can access here.
Noncurrent assets are all assets that are not expected to convert into cash within a year or will take more than a year to sell. Examples of noncurrent assets include:
Fixed assets are purchased without the intent to immediately resell or be consumed within a year. Fixed assets are used for the productive means of a company, and include things like:
Tech equipment such as computers and software
Furniture and fixtures
Fixed assets are often subject to depreciation and will lose value over time. So, business owners will record their fixed assets at their net book values (the original cost) and subtract accumulated depreciation and impairment charges.
Intangible Assets are not physical items but hold value in their principle. Intangible assets include:
Companies that are trying to create a strong brand and invested large sums of money in obtaining these intangible items can add these assets to their company’s value. However, because intangible assets have little liquidity, they can’t be used as collateral for loans. Additionally, intangible assets must be purchased in order for them to be recorded in your balance sheet.
Over time, purchased intangible assets are subject to amortization, which is the equivalent of depreciation, where a patent or trademark loses value over time. Knowing your basis of assets allows you to figure the depreciation, amortization, depletion, casualty losses, and any profits or losses if you sell your property.
The non-current assets formula is the same as the current assets formula, where tangible assets, such as fixed assets like property, plants, equipment, land, buildings, long-term investments and intangible assets like goodwill, patents, trademarks, copyrights are added together.
Non-Current Assets = Tangible/Fixed Assets plus Intangible Assets
Total assets are the sum of both your current assets and noncurrent, or long-term, assets. Below, you’ll find our long term asset example using Home Depot’s breakdown of long-term assets as of February 3, 2019:
Home Depot’s Long-Term Assets
Net Property and Equipment: $23,375,000
Other Assets: $847,000
Long-Term Assets: $25,474,000
To calculate total assets, all you have to do is add the sum of current assets and long-term assets. To calculate Home Depot’s total assets, simply add their current assets ($18,529,000) to their long-term assets ($25,474,000). With these numbers, you’ll come up with $44,003,000 for Home Depot’s total assets.
Liabilities, on the other hand, are typically listed based on their due dates and are categorized as either current liabilities or long-term liabilities. As we know, current liabilities are short-term debts and obligations a company has, such as wages payable and accounts payable. But companies also have long-term liabilities as well.
Long-term liabilities are debts and obligations that are not due within 1 year. These noncurrent liabilities give owners, investors, and lenders a better understanding of the company’s long-term prosperity. Some long-term liability examples include:
Post-retirement healthcare liabilities
Deferred income taxes
On your company’s balance sheet, all types of assets and liabilities will be calculated, which will help calculate the net worth, or shareholder’s equity, of your company. As long as your company has more assets than liabilities, you should be in good financial standing.
In order to calculate the total liabilities of a company, simply add the sum of current liabilities with long-term liabilities, and you’ll find the total. Below are Home Depot’s long-term liabilities as of February 3, 2019:
Home Depot’s Long-Term Liabilities
Long-Term Debt, Excluding Current Installments: $26,807,000
Deferred Income Taxes: $491,000
Other Long-Term Liabilities: $1,867,000
Long-Term Liabilities: $29,165,000
Now that you have Home Depot’s long-term liabilities ($29,165,00), you can find Home Depot’s total liabilities by adding the sum of their current liabilities ($16,716,000) and long-term liabilities to get a total liability sum of $45,881,000.
The last piece to completing your balance sheet is calculating shareholder’s equity. As previously mentioned, shareholder’s equity is the business owner’s residual claim after all debts have been paid. To calculate shareholder’s equity, use the shareholder’s equity formula:
Shareholder’s Equity = Total Assets - Total Liabilities
Using our Home Depot example, we know their total assets are $44,003,000 and their total liabilities are $45,881,000. If you subtract their total liabilities from their total assets, you’ll get a deficit of $1,878,000. What does a negative shareholder’s equity mean? It means the company does not have enough liquid assets to pay off its debts. Shareholder’s equity measures a company’s net worth and having a deficit can be due to a variety of reasons, such as excessive borrowing, the amortization of tangible assets, and accumulated losses.
Knowing how to calculate current assets with the current assets formula allows you to gain a better understanding of your company’s financial health and will help you fund day-to-day business operations, pay for operating expenses, and tackle current liabilities and debts.
Additionally, using the non-current assets formula, current assets formula, and long-term assets formula allows you to calculate total assets, which in turn provides a bigger picture of your company’s future financial health. These formulas can then be used in conjunction with the current liabilities, non-current liabilities, and long-term liabilities formulas to calculate total liabilities and the shareholder's equity of your company. Utilizing analytics for your business, such as calculating ratios and understanding your customer base, will paint a clearer picture of other areas of your company, such as how to track progress and where to secure outside funding.
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