Definition of Short Term Assets
Short term assets refers to the Assets of the company that generates revenue for the business within a year and also these assets also known as current assets are most liquid in nature i.e., they can be converted into cash or can be sold in the market to realize money within a period of one year.
Short term assets are those assets that the company expect to sale in the market to convert them into cash within a period of 1 year. These assets are also known as current assets of the company and are shown in the balance sheet under the assets side of the balance sheet. The example of the current assets are stock/inventory, cash and cash equivalents, trade receivables short term deposits, marketable securities, prepaid expenses etc. Moreover, these assets are important for the business to earn money in the normal course of business i.e. they are the main source of income of the business. Generally, in the trading business, short term assets are majorly used.
Examples of Short Term Assets
Various examples of short term assets are:
- Cash & Cash Equivalents: Cash & Cash equivalents include cash balance, bank balance, fixed deposits etc.
- Trade Receivables: Trade receivables include the amount that is owed to the company by the outsider. Basically, they are the company’s debtors who have purchased the goods of the company on credit and are yet to pay to the company.
- Short Term Deposits: These deposits are security deposits with the government authorities like eLectricity Department Etc. and Are Recorded as Current Assets of The Company.
- Prepaid Expenses: Prepaid expenses refer to the expenses that are paid in advance by the company but the benefits from such cash outflows will be received in the future. For example, salary paid advance etc.
Let’s look at the practical example of the short term asset:
Mr. Nick started a business of trading of curtains by bringing capital $500,000 in the bank account from which he purchased an office building that cost him $ 63,000. He also purchased furniture for $25,000. The inventory purchased of $15,000 was purchased by him. Also during an accounting year, he sold inventory that costs him $2,500 for cash and inventory costing $3,500 for credit. So we need to calculate the short term assets of the business at the end of the period
From the above transactions, office building and furniture are long-term assets so they are not to be calculated as are not included in short-term assets.
Calculation of short term asset:
- Cash: cash received was $2,500 from the sale of inventory. Therefore cash is $2,500 at the end.
- Bank: the bank balance should be $500,000 less $63,000 (cost of building) less $25,000(furniture) less $15,000 (inventory) which is equal to $397,000.
- Inventory balance is $15,000 minus $2,500 minus $3,500 which is equal to $9,000.
- Trade receivable is $3,500.
Therefore, total short term assets = $2,500+$397,000+$9,000+$3,500 = $412,000.
Short Term Assets vs Long Term Assets
Following are the major differences between short term and the long term assets.
- The long term assets are such assets that are used for long duration i.e. more than a year in the business to generate revenue whereas short term assets are those assets that are used for less than a year and generate revenue/income within one year period.
- The long term assets are not readily converted into cash as they are used for several years so they are not used to meet short term operational requirements of the business whereas short term assets are used to meet the short term operational requirements of the business as these assets are readily converted into cash.
- The depreciation is charged on Long term assets which divide the cost of such asset by booking it as an expense over the period of its useful life whereas no such depreciation is charged on the short term assets of the business.
- On sale of long term assets the capital gain and loss earned and incurred respectively are referred to as long term capital gain/l loss whereas on the sale of short term asset, the gain/loss incurred is referred to as short term capital gain/loss.
Advantages of Short Term Assets
The advantages of short terms assets are:
- The short term assets are the most liquid assets of the company so they are the most essential part of the business because they are available to meet short term requirements.
- The cost of funding on the short term assets of the company is low as compared to the long term assets and the loans to purchase short term asset are faster to obtain.
- If the short term assets are more in the company then it shows that the liquidity position of the company is very high.
- Also, the amount of current assets are used to do the ratio analysis as the figure is used to calculate various liquidity ratios such as current ratio, quick ratio, etc. so that the liquidity position of the company can be measured.
Disadvantages of Short Term Assets
The advantages of short terms assets are:
- Sometimes the large portion of the current assets in the business indicates that the financial position of the company is not good.
- If the current assets are too much that it also reflects that short-term assets are stuck are unable to get realized into cash which can result in the loss of market share of the business.
Thus, Short term assets are the assets that are highly liquid as they are readily convertible into cash. These assets are helpful in the working capital management of the company as the funds are arranged from these short term assets to meet the day to day requirement of the business. These assets include cash balance, bank balance, inventory and other assets that can generate revenue within a period of one year.
This is a guide to Short Term Assets. Here we also discuss the definition and examples of short term assets along with advantages and disadvantages. You may also have a look at the following articles to learn more –