Current assets

Definition of Current Assets

Current assets remain in a company only for a short period of time, as they are used for short-term purposes such as sale, consumption, processing, or repayment. They do not serve the business on a permanent basis and must be more readily convertible to cash in the short term. Current assets must be reported separately on the balance sheet, where they are listed under assets alongside fixed assets, equity, liabilities, and prepaid expenses. There is no specific definition of the term in the German Commercial Code (HGB). Instead, anything that cannot be classified as fixed assets or prepaid expenses is categorized as current assets. Assets owned by a party outside the company are not considered current assets. As part of the balance sheet, current assets play a central role in the valuation of a company and indicate how much capital a business can expend in the short term.

What is the difference between current assets and fixed assets?

Current assets remain in a company only briefly and are used to cover short-term liabilities. Their value fluctuates constantly. Fixed assets, on the other hand, consist of assets that are permanently anchored in the company and are recognized on the balance sheet with useful lives spanning several years. They are therefore long-term in nature. Fixed assets include, for example, items such as licenses, land, buildings, machinery, computer equipment, and rights of use. Current assets consist, among other things, of inventories of raw materials, supplies, and consumables; work-in-progress; accounts receivable; investments in affiliated companies; bank balances; and checks. According to Section 266 of the German Commercial Code (HGB), both fixed assets and current assets are listed on the asset side of the balance sheet. Together, they constitute a company’s total assets.

How do you calculate current assets?

Due to constant fluctuations, the amount of current assets—unlike that of fixed assets—is usually difficult to quantify. Nevertheless, there are standard methods for calculating it: the subtractive (indirect) and the additive (direct) approaches. In the subtractive method, fixed assets are deducted from total company assets. This approach aligns with the German Commercial Code (HGB) perspective, which defines current assets as all assets that are not fixed assets. In contrast, the additive method involves summing the individual asset items that are classified as current assets.

Once current assets have been determined, other important balance sheet ratios—such as asset intensity, turnover ratio, and working capital—can be calculated.

Asset intensity indicates the ratio of fixed assets to current assets. It provides insight into how quickly a company’s (current) assets can be converted into cash. In the retail and service sectors, the proportion of current assets is usually higher, whereas in the manufacturing sector, the proportion of fixed assets is higher. Asset intensity is calculated using this formula: Asset intensity = Fixed assets / Current assets.

The current ratio indicates the relationship between total assets and current assets. It thus shows the percentage of current assets relative to total assets. A high current ratio indicates that a smaller portion of capital is tied up and that the company has greater flexibility. The formula for calculating the current ratio is: Current Ratio = Current Assets / Total Assets.

Working capital, also known as operating capital, represents the difference between a company’s current assets and its current liabilities (with a maturity of one year or less). Working capital is calculated using the following formula: Working Capital = Current Assets – Current Liabilities. If the calculation yields a positive value, this means that current liabilities are not financed exclusively by current assets, but also by fixed assets.