How do companies use current assets
Current Assets: This is a definition you should know
Current assets as a demarcation from fixed assets
The best way to understand current assets is to distinguish them from fixed assets. In the balance sheet of a company, the current assets are listed on the assets side under point B, directly below or after the fixed assets.
Its definition can easily be derived from the name: That Current assets consist of values and objectsthat the company usually does only available for a short time stand.
This also makes the contrast to fixed assets clear: These are available to the company over the long term. The Current assets is therefore not intended to serve business operations on a permanent basis, but rather turns over at short notice.
In a nutshell and in a somewhat simplified way, the definition of current assets and fixed assets is: What remains in the company are fixed assets. What leaves the company sooner or later in the course of business operations is current assets.
There is no separate definition of current assets in the Commercial Code (HGB). From a legal point of view, it is a remnant of everything that is not fixed assets. Regardless, it is Current assets according to § 266 Abs. 2B HGB in the balance sheet in four categories to be structured:
- Receivables and other assets
- Cash in hand, Bundesbank balances, bank balances and checks
Examples of working capital
The examples of current assets are very diverse and depend on the industry, area and business model. Current assets, which are common to most businesses, can consist of:
- Cash on hand
- manufactured products
- Raw materials
- Auxiliary materials
- advance payments made
To illustrate the difference to fixed assets, we give you a few examples of assets that are usually tied up in a company for the long term:
- Business equipment
- long-term investments
Evaluate working capital
There are prescribed depreciation methods for fixed assets. At the Current assets is there no scheduled depreciation. According to Section 253 (4) of the German Commercial Code (HGB), it may be valued at a maximum of the cost of production or acquisition. If the current market price is below the purchase or production price, you have to make depreciation on this.
You go after that Lowest value principle in front. This can best be explained with an example: At a certain point in time you bought securities at a price of € 100. On the balance sheet date, the value of the papers was € 90. Enter the lower value on the balance sheet, in this case € 90.
Current assets or fixed assets?
As clear as the definition of current assets and fixed assets is, it is sometimes difficult in practice to determine what a specific asset belongs to. A common example is building. These are provided by a medium-sized supplier usually fixed assets at one Real estate agent however, buildings are mostly Part of current assets.
Another example are requirements of a business. These belong usually for current assets. At a car dealership, however, claims can - think about it Leasing contracts - serve long-term corporate financing and therefore Part of fixed assets be.
In order to make a distinction, the purpose of the property has to be analyzed. Securities are only included in current assets if they are intended for sale or as a short-term liquidity reserve. Capital market papers for long-term investments are to be shown in the balance sheet as fixed assets.
Current assets are not the same as working capital
You should not equate with current assets, the English-language technical term "Working capital". In contrast to current and fixed assets, working capital also includes the liabilities side of a balance sheet. To obtain the key figure “working capital”, subtract the short-term liabilities from the current assets.
The current assets are in English "Current Assets" called. Current assets include those assets that are converted into money, i.e. sold or consumed, within the normal business cycle. As is well known, the business cycle usually lasts one year, so that according to this definition, current assets only include positions that remain in the company for less than a year.
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