Permanent Current Assets
Permanent Current Assets is the minimum level of current assets which the company needs to operate. The company cannot operate without any current such as cash, inventory, and other current assets. They require cash for any payment to suppliers, without cash the company will face liquidating that is a major cause of bankrupt. For the trading company, they must maintain the inventory in the warehouse as it needs to be ready for the customers.
The current asset is the asset that will be sold or consumed within a year. However, the permanent current asset will not be sold or consumed but replace by other current assets within a year.
Permanent Current Assets Example
Company A is a trading company that purchases products from overseas and distributes it within the country. In order to maintain a smooth business operation, each store must maintain a minimum level of inventory for each store. The total minimum stock of all stores equal to $ 5,000,000. At the same time, the company also maintain the cash balance of $ 1,500,000 for the daily and monthly payment to suppliers, staff, and other parties. Whenever the cash balance falls below this amount, the company will look for other sources of cash to reserve before it is too late.
So the permanent current assets for company is equal to $ 6,500,000 (5,000,000 + 1,500,000) in order to operate smoothly. We assume, there is no other current asset require for this business.
Temporary Current Assets
Temporary Current assets are the current asset that fluctuates over time, season, and expected to consume or sell within a year. The decrease in these current assets will not impact business operations. They may change due to business activities.
Temporary Current Assets Example
For example, the same company also have other current assets such as accounts receivable, advance, and other prepayment balance. Anything change regarding these accounts will not impact the business operation. The management will not worry if these accounts drop in balance to zero. These are the temporary current assets.