Overview
The concept of “short term” is utilized across various fields such as accounting, taxation, and investment. In each context, it represents a period of one year or less.
Accounting
In accounting, short-term assets are those expected to be converted into cash within the normal operating cycle, which usually spans one year. Similarly, short-term liabilities are obligations that are due within one year or less.
- Current Assets: Assets expected to be used or converted into cash within one year, such as cash, accounts receivable, and inventory.
- Current Liability: Liabilities that are due to be settled within one year, including accounts payable, short-term loans, and other similar obligations.
Investment
In investing, short-term refers to investments with a maturity of one year or less, such as Treasury bills or Certificates of Deposit (CDs).
Taxation
For taxation purposes, short-term refers to assets like stocks or bonds held for less than one year. The capital gains from these investments used to be taxed at the same rate as ordinary income, contrasting with long-term gains that benefit from a more favorable tax rate.
Examples
- Short-Term Assets in Accounting: Cash, marketable securities, and accounts receivable.
- Short-Term Investments: Treasury bills, Certificates of Deposit (CDs), and money market instruments.
- Taxation: Stocks sold within a year of purchase, where short-term capital gains are taxed as ordinary income.
Frequently Asked Questions
Q1: What is considered a short-term liability? A1: Short-term liabilities are financial obligations that are due within one year. Examples include accounts payable, short-term loans, and accrued expenses.
Q2: What qualifies an investment as short-term? A2: An investment is considered short-term if it has a maturity period of one year or less. This includes Treasury bills, CDs, and certain money market funds.
Q3: How are short-term capital gains taxed? A3: Short-term capital gains are taxed as ordinary income, meaning they are subject to the same tax rates as an individual’s standard taxable income, unlike long-term capital gains which are taxed at a reduced rate.
Q4: Can a company’s inventory be considered a short-term asset? A4: Yes, inventory is considered a short-term asset because it is expected to be sold and converted into cash within the normal operating cycle, which is typically one year.
Q5: Are prepaid expenses considered short-term assets? A5: Yes, prepaid expenses that will be used within one year are categorized as short-term assets.
Related Terms with Definitions
- Current Assets: Assets that are expected to be converted into cash, sold, or consumed within one year.
- Current Liability: Obligations that are due to be settled within one year from the date of the financial statement.
- Long-Term Investment: Investments held for more than one year.
- Long-Term Liability: Obligations that are due to be settled beyond one year.
- Capital Gains Tax: Tax on the profit realized from the sale of a non-inventory asset.
Online References
Suggested Books for Further Studies
- “Accounting All-in-One For Dummies” by Kenneth W. Boyd - A comprehensive guide to various accounting aspects including short-term assets and liabilities.
- “The Only Investment Guide You’ll Ever Need” by Andrew Tobias - Covers many types of investments including short-term options.
- “Tax Savvy for Small Business” by Frederick W. Daily - Detailed insights on business taxation including short-term and long-term capital gains.
Fundamentals of Short Term Accounting: Basics Quiz
Thank you for exploring the comprehensive definition and applications of the term “Short Term”!
