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Assets and liabilties are classified as long term or short term and separated on the balance...

Assets and liabilties are classified as long term or short term and separated on the balance sheet. How do we know if an asset or liability needs to classified as short term? Can you provide an example of a business that might have an operating cycle of longer than one year?
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Answer #1

An asset or liability is calssified as a short term if it is known that the same will be transferred or paid off respectively within a period of 12 months or an operating cycle. Generally the operating cycle is 12 months in most of the businesses however it can be longer than 12 months as well.

Take for an example of a real estate company dealing in selling off property. A property is classified as held for sale as soon as the intention to sell the property is clear and is thus shown as a short term asset (current asset), however it may take more than a year to sale the property and realize the full amount.

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