What are Short Term Assets?

Short-term assets (also known as current assets) are those assets that are highly liquid and can be easily sold to realize money from the market, typically within one year. Such short-term assets have a maturity of fewer than 12 months and are highly tradable and marketable.

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Key Takeaways

  • Short-term assets, also known as current assets, have short durability. It includes expenses, cash, securities, accounts receivable, and rent. Moreover, it also helps describe the company’s liquidation and daily business operations.They involve cash equivalents, debtors or accounts receivable, prepaid expenses, and short-term investments.Short-term assets are highly liquid, making them a good portion of the analysis. Any company cannot afford to have too many current assets on their balance sheet, cash in hand, and the bank.The current or short-term assets are convertible and usable. They are of physical form and are tangible.

List of Short Term Assets Examples

The following are the various components of short-term assets:

#1- Cash and Cash Equivalents

Cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more are the liquid cash present in the company’s current balance sheet of the companyBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more. It also consists of a certificate of depositsCertificate Of DepositsA certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period.read more and cash in hand andthe bank.

#2- Debtors or Accounts Receivables

DebtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more or accounts receivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more are the unpaid money of the company against which an invoice has been raised, but the money has not yet been furnished to the company. That is why it is an asset for the company and has its certification and payment cycle.

#3- Prepaid Expenses

Prepaid expensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more are expenses paid in advance for a future period by the company. That is the reason it is showing as an asset to the company. Examples of prepaid expensesExamples Of Prepaid ExpensesPrepaid expense examples will provide an idea of the various payments made by the company in advance for those goods or services which will be procured in future. Some of these include prepaid rent, advance salary and prepaid insurance.read more are office rent, generally paid in full for the quarter or a year as per the leaseLeaseLeasing is an arrangement in which the asset’s right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more agreement.

#4- Short term Investments

When the company has idle cash on its balance sheet, it is forgoing the opportunity costOpportunity CostThe difference between the chosen plan of action and the next best plan is known as the opportunity cost. It’s essentially the cost of the next best alternative that has been forgiven.read more of investment for that idle cash. So, the company opts to invest the unused money in various short-term ventures such as mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more or demand depositsDemand DepositsMoney deposited with a bank or financial institution that can be withdrawn without notice is known as a demand deposit. Due to the shorter lock-in time, it does not pay any interest or a nominal amount of interest.read more.

Advantages of Short Term Assets

  • They are highly liquidLiquidLiquidity is the ease of converting assets or securities into cash.read more and used for working capital management of the companyWorking Capital Management Of The CompanyWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc.read more.They are used for ratio analysis and peer group analysis. It also talks about the liquidity state of the company and how liquid the company is for repaying its short-term obligations.Having a good amount of current assets on the company’s balance sheet makes the company liquid in nature. Also, it tells us about the company’s plans as more cash and more retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more are used for the future and further investment in the company’s future goals.Current or short-term assets are highly convertible and usable. They are of physical existence and are tangible.

Disadvantages of Short Term Assets

  • Too much of the balance sheet is tied up in the current assets; this can be a sign of the bad financial health of the company.Too much capital stuck in the company’s existing assets signifies its inefficient working capital, and the company is not properly using its current assets. It can cause a loss of market shareMarket ShareMarket share determines the company’s contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company’s market position when compared to that of its competitors.read more and business.Short-term assets are highly liquid, making them a good portion for analysis as any company cannot afford to have too many current assets on their balance sheet, especially cash in hand and the bank.

Conclusion

Hence, careful analysis of short-term assets is highly necessary to keep a company operating efficiently. Also, current assets are highly used in ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more of the company, which tells the user where the company is standing compared to its global peers.

This article has been a guide to Short-Term Assets and their definition. Here, we discuss the top 4 short-term assets examples along with explanations. We also discuss its advantages and disadvantages. You may learn more about corporate finance from the following articles: –

Long-term assets have a long shelf-life, e.g., 10, 20, 50 years, etc. At the same time, short-term assets have a term of 1-2 years, up to 5 years. Therefore, one must refrain from converting long-term assets into cash as they are utilized for a few years. They are not used to satisfy short-term business needs. In contrast, short-term assets are used to fulfill short-term business requirements and converted into cash.

A prudent short-term allocation is essential for an individual as it assures earning a sufficient return, adequate liquidity, minimum risks, and taxes, along with helping to achieve financial objectives. Moreover, it also helps to align investments as per time horizon.

Short-term assets known as current assets are not depreciated. Long-term assets are depreciated as an expense over the period being used.

  • Examples of Current AssetsCurrent Assets FormulaReal Assets DefinitionShort Selling Meaning