Difference Between Current Assets And Current Liabilities

We already studied about Current Assets and Current Liabilities in our previous article, but here we study about the difference between Current Assets And Current Liabilities so that we get a clear idea about these Accounting Terms.

It is important to note that the difference between Current Assets And Current Liabilities represent Working Capital that is required for the smooth flow of the business. Mathematically, we can write as shown below:

Current Assets - Current Liabilities = Net Working Capital (NWC)

Here Net Working Capital is the difference between Net Current Assets - Net Current Liabilities.

You may also be interested in “Difference Between Liabilities And Owner’s Equity”

Current Assets are those resources that are used by the business within the current accounting period. Examples include Cash, Accounts Receivable, Inventory, Prepaid Expenses, Outstanding Revenues, etc. while Current Liabilities are the debts payable by the business to outsiders (Accounts Payable, Banks, etc). Examples are Accounts Payable, Salaries Payable, unearned Revenues, etc.

Current Assets are debited when increased and credited when decreased. But in case of Current Liabilities, there is totally reverse situation, i.e., When these are increased these are Credited and Debited When these are decreased.

Both Current Assets and Current Liabilities have balances and at the end of Accounting Period, these are transferred to Balance Sheet. But, Current Assets have Debit Balances and these are transferred to Asset Side of Balance Sheet while Current Liabilities have Credit Balances and these are transferred Liabilities & Equity Side of Balance Sheet.

Relationship Between Current Assets And Current Liabilities

The relationship exists between these two accounting terms in the way that when we utilize the current assets to meet obligations, then our business's operations run smoothly and when we need Working Capital, then we finance it from outsiders in the form of Current Liabilities like Accounts Payable and other Expenses Payable such as Salaries Payable, Wages Payable, Utility bills Payable, etc to generate revenue and smooth running of the business and ultimately acquire or purchase more Current Assets in the form of Cash, Accounts Receivable, Prepaid Expenses, etc. So, there is strong relationship between Current Assets and Current Liabilities.

So, these are the main differences between Current Assets And Current Liabilities in Accounting.