Correctly identifying current assets and current liabilities in a balance sheet is a core skill for every bank credit officer and a frequently tested topic in JAIIB. Misclassification distorts working capital, the current ratio, and the entire credit assessment. This guide covers the definitions, classification criteria, a worked balance sheet example, and the key exam points.

What Are Current Assets?

Current assets are assets that are expected to be converted into cash, sold, or consumed within the normal operating cycle of the business or within twelve months from the balance sheet date, whichever is longer. The definition is drawn from Ind AS 1 / AS 3 and the Companies Act, 2013 (Schedule III).

Criteria for Classifying an Asset as Current

An asset is classified as current if it satisfies any one of the following four conditions:

1. It is expected to be realised, or is intended for sale or consumption, in the company’s normal operating cycle
2. It is held primarily for the purpose of trading
3. It is expected to be realised within twelve months after the reporting date
4. It is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date

Everything else is classified as a non-current asset.

Components of Current Assets

Item	Why Current?
Cash in hand and cash equivalents	Immediately liquid
Bank balance (current / savings account)	Available on demand
Fixed deposits maturing within 12 months	Realised within reporting period
Inventories — Raw Material, WIP, Finished Goods	Consumed / sold in operating cycle
Stores, spares and consumables	Consumed in production, not held long-term
Goods in transit	Part of operating cycle
Trade receivables (Debtors)	Credit sales — expected within operating cycle
Advances to suppliers	Short-term in nature
Advance tax paid / TDS receivable	Refundable within the year
GST Input Tax Credit (ITC) receivable	Set off against output GST liability
Prepaid expenses	Benefit expires within 12 months
Interest accrued on FDs	Due within the period
Other income receivable (rent, commission etc.)	Expected within operating cycle

Important: Fixed deposits with maturity beyond twelve months are classified as non-current assets, even though banks allow premature withdrawal. Classification is based on the contractual maturity date, not liquidity in theory.

What Are Current Liabilities?

Current liabilities are obligations that are expected to be settled within the normal operating cycle of the business or within twelve months from the balance sheet date.

Criteria for Classifying a Liability as Current

A liability is classified as current if it satisfies any one of the following:

1. It is expected to be settled in the company’s normal operating cycle
2. It is held primarily for the purpose of trading
3. It is due to be settled within twelve months after the reporting date
4. The company does not have an unconditional right to defer settlement for at least twelve months after the reporting date

Components of Current Liabilities

Item	Why Current?
Trade payables (Creditors for goods)	Payable within operating cycle
Outstanding expenses / expenses payable	Due within the year
Cash Credit / Overdraft from bank	Repayable on demand
Short-term loans (other than bank)	Due within 12 months
Current maturities of long-term debt	Instalment of TL falling due within 12 months — must be reclassified
Advance received from customers	Obligation to deliver goods / services within cycle
GST / TDS / Income Tax payable	Statutory dues payable within the year
Provision for income tax	Expected settlement within 12 months
Interest accrued but not due on borrowings	Accrued liability
Unpaid dividend	Due within 30 days of declaration — IEPF if not paid in 7 years
Unpaid matured deposits and interest	Immediately payable
Share application money to be refunded	Obligation to return within prescribed period

Worked Example — Identifying CA and CL in a Balance Sheet

The following is a simplified balance sheet of a manufacturing company (figures in Rs. Lakhs). Study how each item is classified:

Balance Sheet Item	Amount (Rs. L)	Classification	Reason
ASSETS
Inventories (RM + WIP + FG)	45.00	✅ Current Asset	Consumed / sold in operating cycle
Trade Receivables (Debtors)	38.00	✅ Current Asset	Expected realisation within cycle
Cash and Cash Equivalents	8.50	✅ Current Asset	Immediately liquid
Bank Balance (Current A/c)	12.00	✅ Current Asset	Available on demand
FD maturing within 12 months	10.00	✅ Current Asset	Realised within reporting period
Advance Tax / TDS Receivable	3.20	✅ Current Asset	Refundable / set off within year
GST Input Tax Credit (ITC)	2.80	✅ Current Asset	Set off against output GST
Prepaid Expenses	1.50	✅ Current Asset	Benefit expires within 12 months
Total Current Assets (A)	121.00
Fixed Assets (Net Block)	180.00	❌ Non-Current	Long-term productive use
FD maturing after 12 months	15.00	❌ Non-Current	Maturity beyond reporting period
Capital Work-in-Progress (CWIP)	22.00	❌ Non-Current	Not yet ready for use / sale
Total Non-Current Assets (B)	217.00
TOTAL ASSETS (A+B)	338.00
LIABILITIES
Trade Payables (Creditors)	32.00	✅ Current Liability	Payable within operating cycle
Cash Credit / OD from Bank	28.00	✅ Current Liability	Repayable on demand
Current Maturities of Term Loan	12.00	✅ Current Liability	TL instalment due within 12 months — reclassified from non-current
Outstanding Expenses	5.50	✅ Current Liability	Due within the year
GST / TDS Payable	3.00	✅ Current Liability	Statutory dues due within year
Advance from Customers	4.50	✅ Current Liability	Obligation to deliver within cycle
Total Current Liabilities (C)	85.00
Term Loan (less current maturities)	90.00	❌ Non-Current	Repayable beyond 12 months
Other Long-term Liabilities	6.00	❌ Non-Current	Settlement beyond 12 months
Total Non-Current Liabilities (D)	96.00
Share Capital	50.00	Equity
Reserves and Surplus	107.00	Equity
Total Equity (E)	157.00
TOTAL L + E (C+D+E)	338.00

Working Capital = Total Current Assets − Total Current Liabilities = 121 − 85 = Rs. 36 Lakhs

Current Ratio = 121 ÷ 85 = 1.42 : 1  (above the Tandon Committee benchmark of 1.33:1 — satisfactory for a manufacturing unit)

Tricky Items — Where Credit Officers Often Go Wrong

Item	Common Mistake	Correct Classification
FD with maturity > 12 months	Treated as current because it can be broken early	Non-current — classify on contractual maturity, not theoretical liquidity
Current maturities of term loan	Left under non-current borrowings	Must be reclassified to current liabilities (DPBP instalment due within year)
Advance tax paid / TDS	Ignored or classified as non-current	Current asset — set off / refunded within the assessment year
GST Input Tax Credit (ITC)	Not identified as a current asset	Current asset — set off against output liability within operating cycle
Share application money to be refunded	Treated as equity	Current liability — obligatory refund within prescribed period
Long-term security deposits (e.g., lease deposit)	Classified as current advance	Non-current asset if refund is beyond 12 months
Deferred tax asset / liability	Mixed with current items	Always non-current under Ind AS 12 — never classified as current

Impact of Misclassification on Credit Analysis

For a bank credit officer, misclassification of current assets and current liabilities directly distorts the credit assessment:

Error	Effect on Working Capital	Effect on Current Ratio	Risk
Current asset classified as non-current (e.g., debtors not identified)	Understated	Lower than actual	Working capital limit sanctioned too low; borrower underfunded
Non-current asset classified as current (e.g., long-term FD shown as CA)	Overstated	Inflated	Overestimation of liquidity; excess credit sanctioned
Current liability classified as non-current (e.g., current maturities of TL missed)	Overstated	Inflated	Disguises repayment pressure; debt-service stress underestimated
Non-current liability classified as current (e.g., entire term loan shown as CL)	Understated	Depressed	Borrower appears weaker than actual — unfair credit decision

Current Ratio, Quick Ratio and the Tandon Committee Norm

Two key ratios derived from CA and CL are central to working capital assessment in Indian banking:

• Current Ratio = Current Assets ÷ Current Liabilities — Tandon Committee / RBI norm: minimum 1.33:1 for working capital finance under Method II (Second Method of Lending)
• Quick Ratio (Acid Test) = (Current Assets − Inventories) ÷ Current Liabilities — tests liquidity excluding slow-moving stock; general benchmark: ≥ 1:1
• Net Working Capital (NWC) = Current Assets − Current Liabilities — positive NWC means long-term funds are partly financing working capital, which is the healthy banking norm

Under the Tandon Committee Method II, the borrower is expected to fund at least 25% of total current assets from long-term sources (own funds + term borrowings). This is why current ratio below 1.33:1 is a red flag — it signals the borrower is funding long-term assets with short-term bank credit.

JAIIB Exam Notes — Current Assets and Current Liabilities

⚠️ Frequently tested in JAIIB Principles & Practices of Banking (PPB) and Credit modules

• Current asset = realisable within 12 months or within normal operating cycle, whichever is longer
• FD > 12 months = non-current, even if breakable early
• Current maturities of long-term debt must always be reclassified to current liabilities — most commonly missed in balance sheet analysis
• GST ITC receivable = current asset (replaced old VAT/Excise/Service Tax credit)
• Deferred tax asset/liability = always non-current (never classify as current)
• Current Ratio benchmark = 1.33:1 (Tandon Committee Method II / RBI norm for working capital)
• Working Capital = CA − CL | Current Ratio = CA ÷ CL
• Quick Ratio excludes inventories from current assets
• CA wrongly shown as non-current → working capital understated, current ratio lower
• Non-current liability wrongly shown as current → current ratio depressed