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 tradeable and marketable in nature.
List of Short Term Assets Examples
The following are the various components of short term assets:
#1- Cash and Cash Equivalents
#2- Debtors or Accounts Receivables
Debtors or accounts receivables are the unpaid money of the company, against which 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.
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#3- Prepaid Expenses
Prepaid Expenses are those expense by the company which is paid in advance and are paid for a future period. That is the reason it is showing as an asset to the company. Examples of prepaid expenses are Office rent, which is generally paid in full for the quarter or a year as per the lease agreement.
#4- Short term Investments
When the company has idle cash sitting on its balance sheet, the company is forgoing the opportunity cost of investment for that idle cash. So the company opts to invest the unused money in various short term ventures such as mutual funds or demand deposits in order to invest the money and utilize it.
Advantages of Short Term Assets
- They are highly liquid and are used for the working capital management of the company.
- They are used for ratio analysis and peer group analysis. It also tells about what is the liquidity state of the company and how the liquid is the company is for repaying it’s short term obligations.
- Having a good amount of current assets in the balance sheet of the company makes the company liquid in nature. Also, it tells us about the plans of the company as more cash, and more retained earnings are used for the future and further investment in the future goals of the company.
- Current or short terms assets are highly convertible and usable. They are of physical existence and are tangible.
Disadvantages of Short Term Assets
- Too much portion of the balance sheet is tied up in the current assets; it can be a sign of bad financial health of the company.
- Too much capital stuck in the current assets of the company signifies the inefficient working capital of the company, and the company is not making proper use of its current assets. It can cause a loss of market share and business.
- Short Term Assets are highly liquid, which makes them a good portion for analysis as any company cannot afford to have too many current assets in their balance sheet especially cash in hand and cash at bank.
Hence, careful analysis of short term assets is highly necessary in order to keep a company operating efficiently. Also, current assets are highly used in ratio analysis of the company, which tells the user where the company is standing in comparison with its global peers.
This article has been a guide to what are Short Term Assets and its definition. Here we discuss the top 4 short term assets along with example and explanation. We also discuss its advantages & disadvantages. You may learn more about Corporate Finance from the following articles –