The Same Total, Two Very Different Businesses
Two companies came to us in the same month with almost identical balance sheets. Both showed current assets of about £185,000 against current liabilities of about £128,000. On paper, both had a comfortable cushion. One of them could not make payroll.
The difference was not in the total. It was in what the total was made of. One company had £120,000 in the bank and a short list of reliable customers. The other had most of its current assets tied up in slow stock, an invoice to a customer that had just gone into administration, and a loan to its own director. Both sets of accounts were correct. Only one of them was telling the owner what she needed to know.
That is the point of this guide. Current assets are easy to define and easy to add up. Reading them well takes a little more care, and it is worth the effort, because this is the section of the balance sheet that decides whether your business can pay its bills next month.
What Are Current Assets?
Current assets are the things a business owns that are cash already, or that it expects to turn into cash within twelve months of the balance sheet date. They are sometimes called short term assets or liquid assets.
An asset is a resource the business controls as a result of something that has already happened, and which is expected to bring a future benefit. The word "current" tells you how soon that benefit is expected to arrive as cash. Stock will be sold. Customers will pay their invoices. Insurance paid in advance will be used up over the year. Cash is cash.
FRS 102, the accounting standard most UK private companies follow, treats an asset as current if any of these apply:
- The business expects to realise it, sell it or consume it in its normal operating cycle.
- It is held mainly for trading.
- The business expects to realise it within twelve months of the reporting date.
- It is cash or a cash equivalent, unless it is restricted from being used for at least twelve months.
Everything else is a non-current asset. In UK accounts, non-current assets are nearly always labelled fixed assets, and we cover them in our guide to what fixed assets are.
Current Assets Examples
The Companies Act balance sheet format sets out the headings UK companies use. Under "Current assets" you will find four groups, in this order.
| Heading | What it includes | Notes |
|---|---|---|
| Stocks | Raw materials, work in progress, finished goods, goods for resale, payments on account to suppliers | Valued at the lower of cost and what it will sell for. See cost of sales |
| Debtors | Trade debtors, other debtors, amounts owed by group companies, prepayments, accrued income, called up share capital not paid | Trade debtors are the customer invoices you have raised but not yet been paid. See trade receivables |
| Investments | Short term investments held for sale, such as a fixed term deposit maturing within the year | Rare in small companies |
| Cash at bank and in hand | Current account balances, savings accounts, petty cash, undeposited takings | Overdrafts go the other way, under current liabilities |
In practice, the current assets we see on almost every small company balance sheet in North London and Hertfordshire are:
- Stock, if the business sells physical goods.
- Trade debtors, the money customers owe for invoices already issued.
- Other debtors, which is where an overdrawn director's loan account usually sits, along with rent deposits and loans to staff.
- Prepayments, costs paid before the year end that relate to the next year, such as insurance, rent paid in advance or an annual software subscription. Our guide to accruals and prepayments explains the adjustment.
- Accrued income, work you have done but not yet invoiced at the year end. See what accrued income is.
- VAT or corporation tax recoverable, when HMRC owes you money, for example a VAT repayment on a quarter where you bought more than you sold, or a tax refund from R&D tax credits.
- Cash at bank and in hand, including petty cash.
Notice what is not on the list. Vehicles, computers, machinery, the shop fit-out and the office itself are all fixed assets, however easy they might be to sell.
Is Inventory a Current Asset?
Yes. Stock, which the Companies Act still calls stocks and most software calls inventory, is a current asset because the whole point of holding it is to sell it within the normal trading cycle.
That stays true even when a particular line of stock has sat on the shelf for two years. The classification does not change, but the value should. Stock is carried at the lower of its cost and its estimated selling price less any costs to finish and sell it. Stock that will only sell at a discount, or not at all, should be written down. The write-down reduces profit, it reduces current assets, and it is usually allowable for tax, because HMRC accepts stock valued in line with the accounting standards. We see far too many year end accounts where the stock figure is simply last year's figure plus purchases less sales, with no one having walked round the stockroom.
Is Equipment a Current Asset?
No, with one exception. Equipment, vehicles, furniture and computers that the business uses to trade are fixed assets. They are held for the long term and their cost is spread over their working life through depreciation.
The exception is a business that sells equipment. A van is a fixed asset for a plumber and a current asset for a van dealer. The same laptop is a fixed asset on your desk and stock on a retailer's shelf. Classification follows what the business intends to do with the item, not what the item is.
Current vs Non-Current Assets
| Current assets | Non-current (fixed) assets | |
|---|---|---|
| Turns into cash | Within 12 months, or in the normal trading cycle | Over more than 12 months, or never intended to be sold |
| UK format heading | Current assets | Fixed assets |
| Typical items | Stock, debtors, prepayments, cash | Property, vehicles, equipment, goodwill, software, long term investments |
| How the value falls | Written down when stock or debts go bad | Depreciation or amortisation each year |
| Used in | Working capital, current ratio, quick ratio | Capital employed, asset turnover, gearing |
| Who watches it | Suppliers, credit agencies, invoice financers | Banks lending against property, investors |
One UK quirk is worth knowing. Under FRS 102 and the Companies Act formats, a debtor that will not be collected for more than a year still sits under "Debtors" within current assets. The amount due after more than one year must be disclosed separately, usually in a note, but the statutory heading does not move. If you sell a £30,000 machine to a customer on a 24 month payment plan, the £15,000 due in year two is shown within debtors with a separate disclosure, not under fixed assets. Anyone comparing a UK balance sheet with one prepared under international standards, where that £15,000 would be a non-current receivable, can be caught out by this.
The Current Assets Formula
There is no clever formula. You add up the four headings:
Current assets = stock + debtors + short term investments + cash
If you only have totals to work with, the accounting equation gets you there from the other direction:
Current assets = total assets − fixed assets
The figure on its own tells you little. It earns its keep in two comparisons.
Net current assets = current assets − current liabilities. This is the line a UK balance sheet actually prints, and it is the same thing as working capital. If it is negative, the accounts show net current liabilities instead.
Current ratio = current assets ÷ current liabilities. This turns the same comparison into a multiple. Our guide to the current ratio covers what a sensible figure looks like for different kinds of business.
The next line down on a UK balance sheet is total assets less current liabilities, which is fixed assets plus net current assets. Lenders like it because it shows what is left to cover long term debt once the short term bills are paid.
Why the Quality of Current Assets Matters More Than the Total
This is where the two companies from the start of the guide come in. Here is the second one, which we will call Southgate Lighting Ltd, a fictional lighting wholesaler with a 31 March year end.
| Current assets at 31 March 2026 | £ |
|---|---|
| Stock | 62,000 |
| Trade debtors | 74,000 |
| Other debtors | 6,000 |
| Director's loan account | 18,000 |
| Prepayments | 4,500 |
| Cash at bank | 21,000 |
| Total current assets | 185,500 |
Current liabilities were £128,000. Net current assets of £57,500 and a current ratio of 1.45. A credit agency pulling these accounts from Companies House would score the company as comfortably liquid.
Now look at what the lines are made of.
- £11,000 of the stock was discontinued fittings that had not sold in eighteen months. Realistic value: perhaps £3,000 at auction.
- £9,000 of the trade debtors was owed by a customer that entered administration in April. Realistic value: close to nil.
- The £18,000 director's loan was money the director had drawn during the year. He had no intention of paying it back in cash. It would be cleared by voting a dividend in the next accounts, which puts cash in nobody's hands. See our guide to the director's loan account for the s455 tax charge that this also triggers if it is still outstanding nine months after the year end.
Strip those out and the current assets that could realistically become cash were about £147,500. Against £128,000 of current liabilities, that is a current ratio of 1.15 and a cushion of under £20,000, in a business with a monthly payroll of £31,000. The quick ratio, which leaves stock out entirely, was 0.96 on the published figures and lower still on the honest ones. That is the balance sheet of a business one slow month away from trouble, and the published total of £185,500 gave no hint of it.
Is a Director's Loan a Current Asset?
When the director owes the company money, yes. An overdrawn director's loan account is shown under other debtors within current assets, because the director is a debtor like any other and the loan is, in law, repayable.
Our view is that it is the weakest current asset on most small company balance sheets. It is rarely repaid in cash. It usually gets cleared by a dividend or a bonus, which moves it from one part of the accounts to another without a pound arriving in the bank. Lenders know this, and most will deduct an overdrawn director's loan from current assets before they calculate anything. If you want your accounts to be read kindly, clear the loan before the year end or keep it small. When the company owes the director instead, the balance is a liability, and our current liabilities guide explains where it goes.
Is Cash Always a Current Asset?
Almost always, but not quite. Cash in the current account, savings accounts and notice accounts is current. So are cash equivalents, which FRS 102 defines as short term, highly liquid investments that can be turned into a known amount of cash and had three months or less to run when you bought them.
A fixed term deposit with more than twelve months to run at the balance sheet date is not a current asset. Neither is cash that is formally restricted, such as money held in an escrow account for a property deal completing in two years. And cryptocurrency is not cash at all. Depending on why the business holds it, it is usually treated as an intangible fixed asset or as stock, and its value needs careful support.
Your Current Assets Are Also Your Borrowing Base
A practical point that textbooks skip. For a small business, current assets are the easiest things to borrow against. Invoice finance lenders typically advance 70% to 90% of approved trade debtors. Stock finance exists for businesses with large, saleable inventory, though the terms are tighter. An overdraft is often sized on the same figures.
This has two consequences. The first is that keeping your sales ledger clean, with invoices raised promptly and disputes resolved quickly, directly increases what you can borrow. Our guide to debtor days shows how to track that. The second is that a lender will do its own version of the quality test above. It will exclude debts over 90 days, related party balances and anything in dispute before it decides how much to lend. If you run that test yourself first, you will not be surprised by the answer.
Where Current Assets Sit on a UK Balance Sheet
A full UK balance sheet runs in this order: fixed assets, then current assets, then creditors falling due within one year, then net current assets, then total assets less current liabilities, then long term creditors and provisions, then capital and reserves. Current assets are always the second block.
Companies filing micro-entity accounts under FRS 105 show a single line for current assets with no breakdown, plus a separate line for prepayments and accrued income. Small companies filing under FRS 102 Section 1A show the four statutory headings. Either way, the total is on the public record at Companies House, and credit scoring models read it the moment it is filed.
Our View
Most owners look at the bank balance and the profit figure and skip everything in between. We think the current assets block deserves a monthly look, and three questions in particular.
First, how old is the stock, and would you pay today's book value for it? Second, which debtors are over 60 days, and have you actually chased them? Third, is there a director's loan or other related party balance in there that will never be cash? Answer those honestly and you will know more about the health of your business than the published current ratio will ever tell you.
How IAK Can Help
We prepare year end accounts for limited companies, sole traders and small businesses across North London and Hertfordshire, and we review stock, debtors and director's loan balances before anything goes to Companies House. Our bookkeeping service keeps the sales ledger current so your debtors figure is one you can rely on, and our management reporting service tracks net current assets month by month so a bad trend shows up while there is still time to fix it. If your balance sheet looks healthy on paper and feels tight in practice, get in touch.
Sources
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Council, Section 4 on current asset classification, Section 7 on cash equivalents and Section 13 on inventories.
- FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, Financial Reporting Council, for the micro-entity balance sheet format.
- The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008, Schedule 1, legislation.gov.uk, for the balance sheet formats and the current assets headings.
- Director's loans, GOV.UK, on the tax treatment of an overdrawn director's loan account.
- HMRC Business Income Manual, stock valuation, on valuing stock for tax in line with accounting standards.
- HMRC Business Income Manual, bad and doubtful debts, on when a provision against a debtor is allowable.