Introduction to Other Current Assets
Other current asset or OCA are the list of things of which a company owns, draws benefit by putting these into use and it also helps in generating income which can be further converted into cash within one business cycle i.e. these are a list of things which hold some value but are termed as “other” because there are very uncommon or not significant like assets such as cash, bank balance, inventory, prepaid expenses etc.
Explanation
Other assets are generally uncommon or insignificant class of assets that holds a certain value. They are used by the company and generate return too by giving the benefit to the company. They are also highly liquid like the assets and the cash conversion cycle for these are less than a year. These are also listed on the balance sheet and together with the assets type form a part of the total assets of the company. These assets are made to record rarely and hence the net balance in the asset account will be very small. It can be of a very minor sum and as small as some advance which has been made to employees in scenarios of his/her emergency or advances made to suppliers as a down payment or token money. Also, if some the asset such as machinery or land is being readied for sale, it gets recorded in the current asset section of the balance sheet.
Formula for Other Current Assets
The assets do form a part of the total current asset, but they are different to pure assets. The formula to calculate the asset is as follows:
Thus, we see that asset is a part of the total current asset, but it is the insignificant part or very small value which makes the entire the asset. To compute the asset, we need to exclude the cash, cash equivalents, accounts receivables, marketable securities, inventory, and prepaid expenses from the total asset. The balance amount we get after excluding the above from the total asset is the actual value of “other current asset”. This amount is very small and sometimes non-materialistic but accounting, the purpose should be still recorded in the books of accounts.
Examples of Other Current Assets
Let us take an example of a company XYZ which has the following set of items recorded in its balance sheet and thus from these items we will arrive at the asset calculation.
- Cash and Cash Equivalent = $60,000
- Accounts Receivable = $80,000
- Marketable Securities = $20,000
- Inventory = $80,000
- Prepaid Expense = $10,000
Total Current Asset = $255,000 .Thereby, we see the company’s total asset number stands at255,000 where $5,000 is the balancing figure when we add the pure assets. This $5,000 is nothing but the “other current asset” figure which we arrive by deducting the total asset from the pure asset figure.
What is Included in Other Current Assets?
Few examples can be as the following scenarios:
- An advance which has been provided to a need employee during his time of personal emergency can be a part of the asset.
- An advance which has been made to a supplier as down payment or token money is also a part of assets.
- A company can have a piece of land or property that the company is planning to sell and making the required formalities ready. So, now during the phase when the company is readying the land for selling it, this land goes under the asset section of the balance sheet.
- Any amount of restricted cash or investment made by the company will reflect under the section of the asset in the balance sheet.
- Any kind of cash surrender value which has been brought forward against life insurance policies are also considered as a part of the assets.
Advantages and Disadvantages
Below are the advantages and disadvantages mentioned:
Advantages
The advantages are as follows:
- It helps to capture all the small, insignificant and uncommon values under a single category in the books of accounts.
- It helps the management to keep a track of the small amount of advances that are being made available to the employees or the suppliers.
- It is anyways a part of current assets and thus possess a high level of liquidity too.
- The cash conversion cycle of such asset is generally less than a year.
Disadvantages
The disadvantages are as follows:
- There are times where an increment of one of the assets is offset by a decrease of another asset within the “other current asset” group. In such cases, there will be hardly any materialistic deviation to the total.
- An asset which has existed for more than a year or a business cycle will be reclassified as a long-term asset. However, at times these assets are overlooked and are continued to be treated under the assets which is one of the major disadvantages. The working capital requirement rises in such a case.
- At times there is lack of clarity as not all companies give a breakdown of what has been recorded under the section of the assets and just put a single total amount.
- The value at times will be so insignificant that it is a waste of time for auditors to dig into such tiny figures.
Conclusion
The current asset as discussed form as part of balance sheet and even though it may be an uncommon item or insignificant item, the only positive thing observed from the discussion above is that it offers a high level of liquidity as it can be converted into cash within a span of less than a year.
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