Short Term

Reviewed by Sweta | Updated on Sep 30, 2020


Short term refers to a period, and the actual duration is dependent on the law or regulations applicable. In the case of assets, a short term can refer to holding an asset for less than or equal to one year. In the case of current assets of a business, such as inventory or bills receivable, the short term period may be within six months.

Understanding Short Term

From an accounting perspective, a short term can refer to current assets and current liabilities of the foreseeable future. The term current refers to assets which are due for cash conversion and liabilities which are due for payment. The current assets and current liabilities are analysed for determining the ability of a company to generate cash to pay its current liabilities.

In the case of investments, such as mutual funds, stocks, or bonds, the same are short-term when held for a period of up to one year. The sale of short term securities generally gets taxed at a higher rate in comparison to long-term securities. Also, short-term and long-term investments have separate reporting requirements in the balance sheet.

In business, cash in hand, cash at bank, and other cash equivalents are short-term assets or current assets. Most current assets and current liabilities are short-term in nature. Even inventories of raw materials, semi-finished goods, and finished goods are short-term in nature and reported accordingly in the balance sheet.

Short term assets and liabilities are part of the computation of current ratio, liquidity ratio, inventory turnover ratio, and quick ratio. All these ratios examine the ability of a company to generate cash and pay its dues. A business should be able to quickly move its inventory and realise its receivables to finance its working capital needs.


Finance managers need to analyse the short term assets and liabilities, calculate, and analyse the short-term financial ratios to make day to day decisions about the business. The inventory turnover ratio calculates the frequency of conversion of inventory to sales.

The debtor's ratio shows how efficient a company is in collecting its receivables. In the case of securities, investors should be able to understand the short-term nature of the asset and the capital gains liability on its sale.

Related Terms

  • Statutory Audit

    A statutory audit is a legally required check of the accuracy of the financial statements and records of a company or government.   Read more

  • Revaluation Reserve

    Revaluation fund is the accounting term utilised when a business establishes a line item on the balance sheet for the purpose of maintaining a contingency account connected to other assets.   Read more

  • Inflation Accounting

    Inflation accounting is a unique method used to weigh on the published statistics of multinational firms in the effects of soaring or plummeting prices of products in some areas of the world.   Read more

  • Operating Revenue

    Operating revenue refers to the revenue generated by a company from its primary activities.   Read more

  • Escalator Clause

    An escalator clause is also known as an escalation clause, where the provision allows for an automatic increase in the wages or prices.   Read more

  • Agency Problem

    The agency problem is a scenario of a conflict of interest which is inherent in all relations wherein one party is anticipated to operate in the best interests of another party.   Read more

Recent Terms

  • Amortisation

    Amortisation is an accounting strategy used to regularly reduce a loan's book value or an intangible asset's book value over a given period of time.   Read more

  • Rationalisation

    The reorganisation of a firm with the view of enhancing the efficiency of the operation is referred to as the rationalisation.   Read more

  • Profit Centre

    A profit centre refers to a branch, unit, or division of a company which directly adds or which normally adds to the bottom-line or profits of the company as a whole.   Read more

  • Authorised Share Capital

    Authorised share capital is the number of stock units (shares) that a company may issue, as set out in its association memorandum or incorporation papers.   Read more