Short-term assets, often known as securities in investments, are assets kept for less than a year. The term “current” in accounting refers to a short-term asset (one that is projected to be converted into cash in less than a year) or a short-term liability (one that is payable in less than a year).
Accountants consider short-term as current, which is why a current asset is a cash or an asset that will be converted to cash in just a year. When products are sold to clients, inventory is changed to cash, and accounts receivable amounts are turned to cash whenever a client pays an invoice. Current assets include both accounts receivable and inventory amounts.
The ability of a firm to collect sufficient short-term assets to be able to pay short-term liabilities when they become due is referred to as liquidity. A company’s ability to sell products or services and collect immediate cash to fund operations is essential. Managers must pay attention to both liquidity and solvency, which is the process of creating enough cash flow to buy assets over time.
Because capital gains and losses are taxed differently, investors must know if the gain or loss seems to be on a short-term or long-term asset. A long-term gain or loss is defined as security held for a year or more before being sold for tax purposes. Furthermore, because long-term investing and short-term trading are often segregated on tax forms, this has repercussions.