Why are prepaid expenses considered an asset
Accountants view work in progress (WIP) as a short-term asset because it is a kind of inventory asset. Accountants keep inventory assets current because they are reasonably expected to be converted into cash within a year.
Some accountants differentiate between WIP and Work in Process. Work in Process represents the intermediate stage between raw materials and finished goods, while WIP encompasses the development of long-term (long-term) assets. However, this is atypical and most references to work in progress point to a stage in the inventory value.
Understanding Current Assets
For accounting purposes, current assets include all balance sheet accounts with assets that the company can convert to cash within a year. This conversion must take place during normal operation. Liquidation through bankruptcy, for example, would not count.
Common types of short-term assets on the balance sheet are cash, short-term debt securities, prepaid expenses, and marketable securities. Almost all inventories are considered current assets.
Short-term assets are offset by long-term assets, such as long-term borrower's note loans. Intangible assets are also long-term; a company cannot liquidate patents or goodwill.
Work in progress
It is easiest to explain work in progress in the context of a manufacturing process. Imagine a warehouse where wood is used to create tables and chairs. The wood comes as a raw material, unchanged through the production process within the warehouse. Over time, pieces of wood are sorted, cut, polished and joined together. These materials are considered WIPs. As soon as a good is considered ready for sale, it becomes a finished good.
Most production processes take less than a year. An entire finished product can be sold for cash or a claim. Consequently, accountants can view WIP as a short-term asset on the balance sheet.
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