The survival of any entity on this earth’s phase depends upon the existence of resources. Maslow’s Hierarchy of Needs clarifies the resources a human needs for his/her survival: food, clothing and shelter, but there is nothing it talks about concerning a Business’s need.
Thankfully for a business, the corporate world has defined what a business needs to survive in the long run. Every business is endowed with resources, such as cash-flows and petty cash, from which it derives value and helps in sustaining its day-to-day activities and also helps in attaining its long-term goals such as; plant and machinery.
Hence, every business has assets to ensure that it does not seize its operations even during dire situations. There are chiefly two categories of assets one that can support the business for years together with land, building, machinery, and plant, and some that can support the business for the day-to-day activities such as; cash, debtors, etc.
Key Takeaways
- Short-term or current assets can be converted into cash or used up within one year or one operating cycle. In contrast, long-term, non-current assets have a useful life extending beyond one year or one operating cycle.
- Short-term assets include cash, accounts receivable, and inventory, while long-term assets include property, plant, equipment, and intangible assets like patents or trademarks.
- Classifying assets into short-term and long-term categories is essential for financial analysis, as it helps assess a company’s liquidity, solvency, and overall financial health.
Short Term vs Long Term Assets
The difference between short-term and long-term assets is that short-term assets can be recovered within a year, whereas long-term assets cannot be recovered in a year.
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Comparison Table
| Parameter of Comparison | Short-term Asset | Long-term Asset |
|---|---|---|
| Definition | Short-term assets are those assets, the value of which can be recovered within an operating cycle of one year for a business. | Long-term assets are investments in the company that provide long-term benefits to a business. |
| Depreciation | Since short-term assets can be recovered over a year hence, they do not face any depreciation. | Since long-term assets are to provide long-term benefits to the business hence, their cost is distributed over a long term equitably to cover the long-term expenses. |
| Components | Short-term assets are classified into cash and cash equivalents and other current assets. | Long-term assets are classified into property, plant and equipment, trademarks, client lists, patents, and other intangible long-term assets. |
| Record of value | Since they are to be recovered within a year and are affected by market fluctuations and exchange rates hence, they need to be recorded at their current cost. | They are recorded in the books of accounts at their historical costs. |
| Tangibility | They are generally tangible by nature. | Fixed Assets can be classified as tangible as well as intangible. |
What are Short Term Assets?
Short-term assets are either short-term investments or other tangible assets with a recovery cycle ranging from 3-12 months. Some common examples of short-term assets are certificates of deposits, money market accounts, treasuries, bond funds, municipal funds, peer-to-peer lending, and much more.
Companies with a strong cash flow position will have short-term investments account on their balance sheet, which implies that the company can afford to invest additional cash in stocks and shares, bonds, or cash equivalents to earn a higher rate of interest than what it would have earned from a regular savings account.
These are highly liquid assets that are used as temporary parking spaces for cash. Short-term assets are divided into various types:
Certificate of deposit: a certificate of deposit is a pre-agreed sum of money agreed upon by the depositor and the bank for a specified period. It is issued electronically and will automatically get renewed if the depositor cannot decide whether to invest or withdraw the money within the seven-year grace period.
The Reserve Bank of India regulates these securities. Such securities restrict the withdrawal of the amount before the maturity period and are available as a lump-sum amount at the end of the maturity period.
Money market accounts are short-term securities with a short-term recovery of one year. These securities are generally issued by banks, NBFCs, and acceptance houses and help in facilitating the transactions for short-term funds, along with maintaining appropriate liquidity in the market.
They have considered the most secure form of investments since the lenders of money market instruments have a high positive credit rating. The returns are fixed beforehand; the risk of losing the invested capital is very tiny.
Treasury bills: these are risk-hedging securities issued by the Reserve Bank of India and are used to minimize the market risk to investors by aiding them to park their short-term excess funds in various accounts. The reserve bank often issues these at a discount to face value.
Municipal bonds: these bonds are issued by local, state, or non-federal government agencies, offering higher yields and tax advantages as they are often exempt from income taxes.
Peer-to-Peer Lending: often, people lend money on a peer-to-peer basis where two chief parties are involved which are: the borrower and lender. These do not follow any formal procedure for lending as they do not involve any middlemen, such as financial institutions.
What are Long Term Assets?
These assets are those financial investments that will benefit the company in the long run. These investments are usually recorded at their historical value in the book’s accounts and can be either tangible or intangible.
Some of the common types of fixed assets are:
PP&E: PP&E stands for Plant, Property, and Equipment. These are vital for any business operations and cannot be easily converted into cash.
These are tangible by nature and are used for converting into Equity. Many investors consider the purchase of fixed assets a positive sign as they believe that the management has a long-term positive outlook on business existence.
Such assets are generally amortized at the end of their lives after applying depreciation.
Hence, generally, when representing such assets, they are recorded at their historical value with accumulated depreciation deducted at the end of the life of such assets after taking into account the expenditure that has taken place to keep the asset running for the benefit of the business.
Bond Funds: These are mutual funds that invest in bonds and can be understood as a basket of bonds invested in one fund, whether these bonds are of the corporate category or government category. They have varying maturity between 3 years to more than 10 years; They are rewarded the most when in the long term if there is a fall in the interest rates.
Trademarks, patents, and client lists: trademarks are intangible assets legally preventing others from using a business’s logo, name, or another branding. They are used to distinguish one business from the other when they are selling similar or the same products in the market.
Each trademark has a different recipe and can be legally registered quickly. Trademarks are also subject to impairment that is down-valuation.
Patents are those unique inventions that have received formal approval and registration by the government and are capable of industrial application. Client lists consist of every client, whether it exists in writing or not, since the inception of the business and are in regular transaction terms with the business.
Goodwill: It is an intangible asset that is acquired as a result of any merger or acquisition and also determines the reputation of a business. Positive sentiment is spread across the market amongst its buyers and clients if the reputation or the goodwill of the business acquired has a high positive value.
Main Differences Between Short-Term and Long-Term Assets
Short-term and Long-term assets are both assets that play an essential role in the development of any business entity but have varying differences, summarized below:
- Though both are classified as assets, the recovery rate for short-term assets is for one year, and the recovery rate for long-term assets is unspecified.
- Short-term assets are recoverable within a year, whereas long-term assets do not have a specified recovery period and merely rely on writing off or amortising after depreciation.
- Both asset classifications are entirely different short-term assets classified into cash and cash equivalents and other current assets. In contrast, long-term assets are classified into property, plant and equipment, trademarks, client lists, patents, and other intangible long-term assets.
- Current assets are recorded at their current value, whereas fixed assets happen at their historical value in the balance sheet.
- Current assets are generally tangible by nature, whereas fixed assets can be tangible such as; buildings, land, and machinery, as well as intangible such as; patents, copyrights, etc.
- https://www.jstor.org/stable/2296724
- https://www.emerald.com/insight/content/doi/10.1108/00251740410518516/full/html
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
