Financial Accounting · Statement of financial position

Current Assets and Current Liabilities in the Statement of Financial Position

Updated 11 October 2026 · Fact-checked

Current assets are cash and items expected to turn into cash, or be used up, within the operating cycle or twelve months. Current liabilities are obligations due within that time. You measure inventory at the lower of cost and net realisable value, receivables net of allowances, and accruals and prepayments by matching expenses to the period.

Understand Current Assets and Current Liabilities

A current asset is cash, or an asset you expect to sell, use or collect within your normal operating cycle or within twelve months of the reporting date. A current liability is an amount you expect to settle in that same time. Both sit in the statement of financial position. In the ACCA format, non-current assets are shown before current assets, and non-current liabilities are shown before current liabilities.

Each item has its own measurement rule. Inventory is valued at the lower of cost and net realisable value (NRV), each item or group of similar items on its own. This stops you showing an asset at more than you can recover. Trade receivables are shown at the amount you expect to collect: the gross balance less irrecoverable debts written off and less any allowance for receivables.

Accruals and prepayments come from the accruals (matching) concept. A prepayment is an expense paid in advance. The part that relates to the next period is a current asset. An accrual is an expense that belongs to this period but is not yet paid. It is a current liability. If you remember that a prepayment means you have paid too much and an accrual means you have paid too little, you will not mix them up.

Cash includes cash in hand and bank balances. A positive bank balance is a current asset. An overdraft is a current liability. Trade payables are amounts owed to suppliers. Tax owed to the tax authority, such as income tax payable for the year, is a current liability. Sales tax is not an expense of a registered business. You collect it and pay it over. A net sales tax balance owed to the authority is a current liability. If input tax exceeds output tax, the refund due from the authority is a current asset.

In the exam you may be asked to calculate a closing figure, choose the correct inventory value, or say where an item appears. Work from the rule, then the number.

Key formulas to remember

Inventory value (IAS 2): Inventory = lower of cost and net realisable value; Compare item by item or by group of similar items, not across the whole inventory in one total.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated selling costs; Costs to complete apply only to partly finished goods.
Net trade receivables: Net receivables = gross receivables − irrecoverable debts written off − allowance for receivables; The allowance is a deduction from receivables, not a liability.
Prepayment: Prepayment = amount paid × (months of the next period ÷ total months covered); Shown as a current asset. Reduces the expense in profit or loss.
Accrual: Accrual = expense for the period − amount paid for the period; Shown as a current liability. Increases the expense in profit or loss.
Change in allowance: Statement of profit or loss charge = new allowance − old allowance (credit if lower); Only the movement goes to profit or loss.

How to solve Current Assets and Current Liabilities questions

Use this order for any question on current assets and current liabilities.

1Identify the item and decide whether it is an asset or a liability at the reporting date.
2Check the timing: due or realised within twelve months or the operating cycle means current.
3Pick the measurement rule: lower of cost and NRV for inventory, net of allowance for receivables, matching for accruals and prepayments.
4Do the calculation using only the figures that relate to the period or the item.
5Write down the effect on the statement of financial position and on profit or loss.
6Place the item in the correct line and check that totals still make sense.
7Re-read the question for what it asks: a value, a line item, or a profit effect.

Quickest way: Rule-and-sign check for objective test questions

When to use it: Use it in Section A when you have about one to two minutes per question and the answer is a figure or a classification.

Underline the item and the figure asked for.
For inventory, write cost and NRV side by side and circle the lower one.
For accrual or prepayment, ask: have I paid too much (asset) or too little (liability)?
For receivables, subtract write-offs first, then the allowance.
Check the answer: is it a plausible size and the right side of the statement?

Common mistakes in Current Assets and Current Liabilities

Valuing inventory at selling price, or at the higher of cost and NRV.
Students think of inventory as something that makes a profit, so they use the sale price.
Fix: Inventory is never above cost. Compare cost with NRV and take the lower one.
Forgetting to deduct selling costs when finding NRV.
The selling price looks like the answer, and the costs are given in a later line.
Fix: Always write NRV = selling price − costs to complete − selling costs.
Showing a prepayment as a liability or an accrual as an asset.
The words sound alike and students mix up direction.
Fix: Prepayment = paid too much = asset. Accrual = paid too little = liability.
Charging the whole allowance for receivables to profit or loss each year.
Students forget there is an opening allowance.
Fix: Charge or credit only the change: new allowance minus old allowance.
Applying the allowance before deducting irrecoverable debts.
Students apply the percentage to the gross balance.
Fix: Write off known bad debts first. Apply the allowance percentage to the remaining receivables.
Treating sales tax as an expense or as income.
It passes through the ledgers on every sale and purchase.
Fix: The net sales tax owed to the authority is a current liability. The net amount due is output tax less recoverable input tax. If input tax is higher, the refund due is a current asset.

Worked examples

Example 1

At the year end a business holds three items of inventory. Item A: cost $4,000, selling price $6,000, selling costs $500. Item B: cost $3,000, selling price $3,200, selling costs $400. Item C: cost $2,000, selling price $2,600, selling costs $200. What is the closing inventory value?

Show the solution

Item A NRV = 6,000 − 500 = $5,500. Cost $4,000 is lower, so use $4,000.
Item B NRV = 3,200 − 400 = $2,800. NRV is lower than cost $3,000, so use $2,800.
Item C NRV = 2,600 − 200 = $2,400. Cost $2,000 is lower, so use $2,000.
Total = 4,000 + 2,800 + 2,000 = $8,800.

Answer: $8,800

Example 2

A company has trade receivables of $50,000 at the year end. It then writes off an irrecoverable debt of $2,000. It wants an allowance for receivables of 5% of the remaining balance. The opening allowance was $1,800. Also, it paid insurance of $12,000 for the year from 1 October, and its year end is 31 December. What is the net receivables figure, the charge in profit or loss for the allowance, and the insurance prepayment?

Show the solution

Receivables after write-off = 50,000 − 2,000 = $48,000.
Allowance required = 5% × 48,000 = $2,400.
Net receivables = 48,000 − 2,400 = $45,600.
Movement in allowance = 2,400 − 1,800 = $600 increase, so a $600 charge to profit or loss.
Insurance covers 12 months from 1 October. 3 months fall in this year, so 9 months are prepaid.
Prepayment = 12,000 × 9 ÷ 12 = $9,000.

Answer: Net receivables $45,600; allowance charge $600; prepayment $9,000.

Exam tips

Look for the words lower of: if cost is below NRV, cost is used, and no adjustment is needed.
In multiple response questions, check each option against the rule one by one before choosing.
In number entry questions, write down the working so you can spot a missed step, such as a missing opening allowance.
For accruals and prepayments, count months carefully from the start date to the year end.
Check that the item is classified as current or non-current. Many questions test the classification, not the calculation.

Practice questions from Statement of financial position

Current Assets and Current Liabilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Current Assets and Current Liabilities: frequently asked questions

What is the difference between accruals and prepayments?

An accrual is an expense incurred but not yet paid, so it is a current liability. A prepayment is an expense paid in advance for the next period, so it is a current asset. Both adjust the expense to match the period.

How do I value inventory at the lower of cost and net realisable value?

Work out cost and NRV for each item or group of similar items. NRV is selling price less costs to complete and selling costs. Choose the lower figure for each and add them up.

How is the allowance for receivables presented?

Show trade receivables less the allowance as one net figure in current assets. Only the change in the allowance goes to profit or loss. An increase is an expense and a decrease is a credit.

Is a bank overdraft a current asset or a current liability?

It is normally a current liability because it is repayable on demand or within a short time. A positive bank balance is a current asset.