What Are Short-Term Assets? Definition and Examples

Assets are economic resources owned by a business, fundamental to its operations and financial standing. Understanding short-term assets offers insight into a company’s immediate financial health and its capacity to manage daily financial activities.

Understanding Short-Term Assets

Short-term assets, also known as current assets, are resources a company expects to convert into cash, sell, or consume within one operating cycle or one year, whichever period is longer. An operating cycle is the time it takes for a business to purchase inventory, sell it, and collect cash from sales. This timeframe indicates how quickly an asset can be turned into cash without significant loss in value, a concept known as liquidity.

These assets are readily available to fund immediate operations and satisfy short-term financial obligations, providing a clear picture of a company’s short-term solvency.

Examples of Short-Term Assets

Several common categories of assets are classified as short-term due to their expected conversion or consumption timeframe.

Cash and Cash Equivalents

Cash and cash equivalents are the most liquid short-term assets. This category includes physical currency, funds held in bank accounts, and highly liquid investments that can be converted to cash quickly, typically within 90 days, such as money market funds or short-term government securities.

Accounts Receivable

Accounts receivable represents money owed to a company by its customers for goods or services already provided on credit. Businesses typically extend credit with payment terms ranging from 30 to 90 days. Since these amounts are expected to be collected within a short period, they are classified as short-term assets.

Inventory

Inventory includes goods a company holds for sale, raw materials used in production, and items currently in the production process. These assets are considered short-term because they are expected to be sold and converted into cash through normal business activities within the operating cycle.

Marketable Securities

Marketable securities are short-term investments that can be easily bought or sold on public exchanges, such as certain stocks, bonds, or money market instruments. Companies hold these with the intention of selling them within one year. Their high liquidity allows them to be quickly converted to cash if needed, providing a flexible financial cushion.

Prepaid Expenses

Prepaid expenses are payments made in advance for goods or services that a company will receive in the future, such as prepaid rent, insurance premiums, or software subscriptions. Although paid upfront, the benefit from these expenses is consumed over a short period, typically less than one year. As the benefit is realized, the prepaid amount is gradually recognized as an expense.

Short-Term Assets on Financial Statements

Short-term assets are presented on a company’s balance sheet, which provides a snapshot of its financial position at a specific point in time. They are listed under the “Current Assets” section, typically at the top of the asset portion of the balance sheet.

Within the current assets section, items are usually arranged in order of their liquidity, meaning how quickly they can be converted into cash. Cash and cash equivalents are almost always listed first due to their immediate liquidity, followed by other assets like marketable securities, accounts receivable, inventory, and prepaid expenses.

The total value of current assets provides insight into a company’s ability to meet its immediate financial obligations. This is often considered in relation to current liabilities, which are obligations due within the same short timeframe. The difference between current assets and current liabilities is known as working capital, a measure that indicates a company’s operational efficiency and short-term financial stability.