The survival of any entity on the phase of this earth is dependent upon the existence of resources. Maslow’s Hierarchy of Needs clarifies the resources a human needs for his/her survival, which are food clothing and shelter but, there is nothing it talks about concerning a Business’s need.
Thankfully for a business, it is the corporate world that 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 such as; land, building, machinery, plant, and some that can support the business for the day-to-day activities such as; cash, debtors, etc.
Short Term vs Long Term Assets
The main 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.
Comparison Table Between Short Term and Long Term Assets (in Tabular Form)
| 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 for 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 the 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 those assets that are either short-term investments or other tangible assets that have a recovery cycle ranging from 3-12 months. Some common examples of short-term assets are certificates of deposits, money market accounts, treasuries, bonds 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 normal savings account.
These are highly liquid assets that are used as a temporary parking space 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 in the electronic form and will automatically get renewed if the depositor is unable to decide on whether to invest or withdraw the money within the specified grace period of seven years.
These securities are regulated by the Reserve Bank of India. 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: they are short-term securities that have 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 and 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. These are often issued by the reserve bank 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. Purchase of fixed assets is considered a positive sign by many investors as they believe that the management has a long-term positive outlook of 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 easily. 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 are those lists that 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 important role in the development of any business entity but, have varying differences summarized as 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 period of recovery and merely rely on the process of writing off or amortization after depreciation.
- Classification of both the assets is completely different short-term assets are classified into cash and cash equivalents and other current assets whereas, long-term assets are classified into the property, plant and equipment, trademarks, client lists, patents, and other intangible long-term assets.
- Recording of current assets happens at their current value whereas, fixed assets happens at their historical value in the balance sheet.
- Current assets are generally tangible by nature whereas, fixed assets can be tangible such as; building, land, machinery as well as intangible such as; patents, copyrights, etc.
Conclusion
To conclude both the assets play an important role in the existence of an organization, but, possess visible differences concerning their composition and qualities.
Generally, a fixed asset is always sold at a discounted value to write off the long-term costs of the business whereas, current assets are those that generally do not face a depreciation as their value is to be recovered in less than a year.
The fixed assets are always recorded at their historical costs and the current assets are recorded at their current value, as the financial benefit from current assets can be derived within a year.
References
- https://www.jstor.org/stable/2296724
- https://www.emerald.com/insight/content/doi/10.1108/00251740410518516/full/html