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Current Assets & Current Liabilities - Explained in Hindi | #24 Master Investor - YouTube
Channel: Asset Yogi
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MUSIC
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Namaskar, my name is Mukul, and welcome to asset Yogi.
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Where we unlock the knowledge of finance
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In this video, we are going to talk about Current Assets and Current Liabilities.
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we will see In detail what are current assets
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And what are the components of current assets?
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And what are Current Liabilities?
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And what are the things included in current liabilities?
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In addition, we will also learn about the current ratio
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And we will also talk about what is working capital.
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You must watch this video from the beginning till the end.
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Let's go straight to the blackboard.
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Let us understand what are current liabilities and current assets.
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And we also see their examples.
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If we talk about its definition,
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So the current assets are such assets that you can convert into cash within the year
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And current liabilities are the liabilities that you have to pay within 1 year
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Let's talk about examples
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If we talk about current assets, then cash and cash equivalents are current assets.
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The cash in hand company have and
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The money you have in your bank is cash equivalent
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It can be bank deposits
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Bank deposits are the money you have in your bank account,
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Or short-term FD that will be mature in 1 year.
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Or there can be mutual funds which you can encash within 1 year.
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So all these are included in cash and cash equivalents.
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There are some accounts receivable also
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Suppose you lent some goods to a customer
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And if he is going to pay you within 1 year
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So this is included in an account receivable.
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We also call them debtors
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And all the inventory in a company in the form of raw material
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The raw material has to be kept in the warehouse for some time.
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Raw material cannot be converted to cash immediately.
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The raw material is in work in progress
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You have to maintain inventory at the time of manufacturing
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Finished goods are also not sold immediately.
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Finished goods are also kept in the warehouse.
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So the inventory that you have, for some time
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That too has a cost.
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because you can not convert it into cash immediately
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So it is also a current asset.
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You will convert your operating cycle into cash in 3 or 4 months.
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Then you may have some prepaid expenses.
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Which you can bring in current assets.
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Suppose you have pre-paid a year premium of an insurance
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You have given advance payment to a contractor
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So that too is a current asset.
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And you have given a short term loan or advance to any company or an individual
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They will return the payment to you within 1 year.
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So this also comes under current assets.
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So we have discussed current assets
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Now let's talk about current liabilities.
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Your accounts payable
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Suppose you have taken a manufacturing unit on credit from a supplier.
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And suppose you are a retailer.
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Right
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You can take credit from the supplier
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Let's say you take 2 months credit from the supplier.
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So this 2 months account payable will come in current liability.
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If you have taken some short term loans in your company
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which is less than 1 year
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These also come under current liability.
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Cash credit and overdraft facility is also of less than 1 year
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So these also come under Current Liabilities
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And if you have taken advance from any customer
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Advance is given from the customer in many industries.
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For example, let's say if there is a construction
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So the construction contractor took the advance.
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Or if you are designing interior
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So the interior designer will also take some advance from you.
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So the money which is received in advance from the customer
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It comes under Current Liabilities.
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You may also have some outstanding expenses.
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which you have not paid due to some reason
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Let's say rent, you haven't paid rent for a few months
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You may also have some tax dues
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And some due interest payment
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So, if you have any such outstanding expenses,
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then these are also included in the current liabilities.
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And if you have taken any term loan, a term loan is generally for a long period
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The term loan is for 3 to 5 years
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But some of its installments have to be payable within 1 year.
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I am writing here.
Instalment which has to be paid within 1 year,
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Is included in current liabilities.
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So this is the major concept of current assets and current liabilities.
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We also saw the examples of both
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Now let's see what their importance is.
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Let me tell you their importance in investment analysis.
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the current ratio is been calculated
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what is the current ratio
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The formula of the current ratio is current assets divided by current liabilities.
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The current ratio tells you what is the capacity of a company to replenish its liabilities.
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Let the current ratio be 2:1
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That means current assets are almost double to current liabilities
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You can pay all the liabilities with easy
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Meaning the company you are analyzing that company is reasonably sound.
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but if it goes down
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Suppose current assets become 0.7 and current liabilities become 1
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The ratio becomes 0.7:1
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So in this case current liabilities are high and current assets are low
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So the company may have to take a loan and the current liabilities are due immediately.
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So there are high chances of the company's financial situation getting worse.
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I will definitely make a detailed video on the current ratio.
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You must watch that video,
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We will discuss in that video what kind of current ratio there is in the industry.
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And how we can do investment analysis
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The concept of current assets and current liabilities is also used in working capital.
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Working capital = current assets - current liabilities
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What is working capital?
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Working capital is the amount of money that is required for a working cycle.
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As the raw material is used in work in progress.
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Then the work in progress moves to the finished goods.
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Debtors are made from finished goods.
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You may not get the payment immediately
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Then you get the cash from the debtors
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Then it converts back to raw material.
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So this cash to cash cycle can be of two to three months.
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So to manage these 2 to 3 months cycles you require working capital
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Which is calculated from
current asset - current liability.
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I have also made a detailed video on working capital
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In fact, I have made many videos on working capital
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If you want to know about its concept and operating cycle
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Or you want to know how to manage working capital
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so you can watch my videos
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