Short-Term vs Long-Term Assets – Difference and Comparison

What are Short-Term Assets?

Short-term assets are expected to be converted into cash, used up, or sold within one year or the operating cycle, whichever is longer. Short-term assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, and prepaid expenses.

Short-term assets are essential for businesses to fund their daily operations, pay for short-term debt, and meet their short-term financial obligations. Cash and cash equivalents are the liquid of all short-term assets and include cash, checking accounts, money market accounts, and short-term investments.

Accounts receivable are short-term assets representing money owed to a business by its customers. These assets are essential for businesses as it provides them with a short-term source of liquidity. 

Inventory is a short-term asset that includes raw materials, work in progress, and finished goods, held by businesses for sale or conversion into finished goods. Inventory is essential for businesses as it is a source of revenue and allows businesses to meet customer demands. 

Marketable securities are investments in debt and equity quickly converted into cash. These assets are essential for businesses as they can provide a source of liquidity to meet their short-term financing needs.

What are Long-Term Assets?

 A company holds long-term assets for more than one year. These assets are acquired to produce goods or services for an extended period and are expected to benefit the company for more than one year. Long-term assets include property, equipment, and intangible assets such as goodwill, trademarks, and copyrights.

Long-term assets are used to acquire or build resources that a company needs to operate, such as property, equipment, or a fleet of vehicles. They also provide funds for investments or acquisitions and can be used to finance operations.

Long-term assets are also used to fund long-term debt, such as bonds or loans. These assets are essential for a company’s financial security and should be managed and maintained carefully.

Long-term assets are recorded on a company’s balance sheet and are reported at their original cost minus any accumulated depreciation, amortization, or impairment. The value of long-term assets can fluctuate depending on market conditions and should be reviewed regularly to ensure accuracy. Companies must also consider the future value of their long-term assets when planning future operations and making decisions.

Difference Between Short-Term and Long-Term Assets

  1. Short-term assets have a shorter lifespan than long-term assets.
  2. Short-term assets are used to finance operations and day-to-day expenses, while long-term assets are used to finance long-term investments.
  3. Short-term assets generate short-term returns, while long-term assets are used to generate long-term returns.
  4. Short-term assets are more liquid than long-term assets.
  5. Short-term assets generally involve smaller amounts of capital than long-term assets.
  6. Short-term assets depreciate over time, while long-term assets appreciate.

Comparison Between Short-Term and Long-Term Assets

Parameters of comparisonShort-Term AssetsLong-Term Assets
Duration of AssetThe period of the financial asset held is below one year.The period of the financial asset held is over one year.
Status of the capital assetwhenever the owner contains the immovable item for less than two years and movable one for less than three years.Whenever the owner contains the immovable item for more than two years and a movable one for more than three years.
Market aspectinvolves purchasing additional liquid assets over a short-term favorable market perspectiveBuyer maintains a long-term market perspective
Profit attainedLower profits because of the shorter holding periodhigher profit expectations since the holding period are over a year.
Risk involvementLower risks are involved because of the shorter holding period.Riskier due to the extended waiting period

References

  1. Long-Term Assets – Google Books
  2. Analysis of Short-Term Asset Concentration in Islamic Banking by Abbas Mirakhor :: SSRN