The definition of a short term or current asset is cash and other assets that will turn to cash or will be used up or consumed within one year of the balance sheet date. If a company's operating cycle is longer than one year, the definition allows for assets turning to cash, used up, or consumed during the operating cycle to be reported as a current asset.
Often companies are billed in advance for insurance premiums covering a one year period or less. Hence the prepaid amount is usually a current asset.
If a company would have to pay an insurance premium in advance for a period longer than one year, the portion of the prepayments that will not turn to cash within one year (or the operating cycle if it is longer than one year) would be reported as a long term asset.
Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1,700 accounting exam questions (and answers) when you upgrade to PRO.