What is operating period in accounting?

2. Operating period impact on assets and liabilities classification

An operating period has a direct relation to the classification of assets and liabilities on a classified balance sheet.

The definition of current assets states that current assets are cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business."

Usually, when the normal operating period is less than one year, a one-year period is used to distinguish current assets from noncurrent assets. When the operating cycle is greater than one year, the operating period will serve as the proper period for the current assets' classification.

The following items are usually classified as current assets:

  • Cash and cash equivalents
  • Short-term investments
  • Receivables
  • Inventories
  • Prepaid expenses

Any assets that are not deemed to be current fall into the noncurrent assets category. The following assets are usually classified as noncurrent:

  • Long-term investments
  • Tangible assets
  • Property, plant and Equipment
  • Intangible assets
  • Other assets

The same situation applies to liabilities. Current liabilities are those liabilities that a company expects to settle with its current assets. Other liabilities are considered noncurrent liabilities. Usually the following liabilities are classified as current:

  • Accounts payable
  • Trade notes payable
  • Dividends payable
  • Agency collections and withholdings
  • Current portion of long-term debt

Examples of noncurrent liabilities are presented below:

  • Line of credits
  • Long-term loans
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