Discuss the factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet.

The usefulness of the balance sheet is enhanced with assets and liabilities are grouped according to common characteristics.  The broad distinction made in the balance sheet is the current versus long-term classification of both assets and liabilities.

Required:

Post at least 150 words answering the following questions:

1. Discuss the factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet.
2. Identify six items that under different circumstances could be classified as either current or long-term.  Indicate the factors that would determine the correct classification.

Read a selection of your colleagues postings.

Discuss the factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet.

Introduction

When looking at a company’s financial statements, it’s important to understand how assets and liabilities are classified. Assets, for example, can be either current or long-term. Current assets include cash and cash equivalents; accounts receivable; prepaid expenses; accounts payable; and accrued expenses. Listed below are some other examples of long-term assets:

Financial assets are those that can be converted into cash quickly.

Financial assets are those that can be converted into cash quickly. For example, if you have a bank account with $100 in it and the account balance increases to $110, this is a financial asset. If on the other hand your car loan has a balance of $1,000 and then decreases by $500 over time so that it reaches zero before its maturity date (the day when you must pay back all or part of your loan), this would also be considered an asset because it won’t require much effort to turn into cash now that there is less money owed on it than there was when you first took out the loan

Accounts receivable are the funds owed to a company by its customers.

Accounts receivable are funds owed to a company by its customers. They’re usually short term, as they represent money that has been earned in the form of sales but not yet converted into cash, and they can be considered assets if they are expected to be converted into cash quickly.

Prepaid expenses are cash that has been paid in advance for products and services that will be used in the future.

Prepaid expenses are cash that has been paid in advance for products and services that will be used in the future. They can be used to reduce the amount of long-term liabilities on your balance sheet, but they aren’t included in the current assets section of a company’s balance sheet.

Prepaid expenses are classified as long-term liabilities because they have been paid for with future revenues, not profits from current operations or expected profits from future operations. The payment may also come from funds raised by issuing bonds or other debt instruments; this is known as “earning” revenue rather than spending it on goods or services at this point (which would be considered “spending”).

Accounts payable is the money companies owe to other parties.

Accounts payable is the money companies owe to other parties. It includes such things as accounts receivable, prepaid expenses and penalties for late payments, and it can be used to make up part of the current liabilities section on a balance sheet.

If you have a short-term liability (one that will be paid within 12 months), then it should be classified as current; if your liability has an extended maturity date or extends beyond 12 months, then it should be classified as long-term instead. For example: An invoice from a vendor that is due in 30 days would generally be classified as short-term because payment will occur within 30 days after receipt of goods/services provided by them; however if this same invoice has an expected delivery date up until 60 days from now then it would fall under long term liabilities category

Accrued expenses are expenses for which bills have been sent out but not yet paid.

Accrued expenses are expenses for which bills have been sent out but not yet paid, such as salaries and wages. Accrued expenses should be recorded in the current liabilities section of the balance sheet instead of being included in the long-term liabilities section.

Long-term liabilities include all liabilities other than short-term or current liabilities.

• Long-term liabilities include all liabilities other than short-term or current liabilities.
• If you don’t understand the difference between a long-term and a short-term liability, you’re not alone. In fact, many businesspeople don’t understand this distinction either! The truth is that it’s really easy to get confused about these two types of accounts in your financial statements (and if you need some help figuring out what each one means for your business, check out our article on understanding accounting terminology). To make matters worse: when businesses talk about “liabilities,” they usually mean both long-term and short-term accounts; so even though we often refer to them separately here at NerdWallet Newsroom , we won’t do so here because it would just be confusing (and frankly we don’t want to set off another round of arguments).

It’s important to look at the different ways in which assets and liabilities can be classified when determining whether an asset or liability should be classified as current or long-term in a balance sheet.

The most obvious difference between current and long-term assets and liabilities is that one can be liquidated quickly, while the other cannot. In other words, current assets have a short time horizon within which they must be used or converted into cash (usually within 12 months). Long-term assets or liabilities often have a much longer time horizon before they are required to be liquidated.

The factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet include:

• The expected life of the asset/liability;
• How quickly it is expected to earn its cost basis;
• Whether it is related to operating costs of production;

Conclusion

The classification of assets and liabilities affects a company’s net income. It can also affect the amount of cash that a company has available to pay its bills or make investments. The classification of expenses and revenues is important because it helps companies determine whether they should invest in new equipment or hire more employees in order to grow their business.