A line of credit is a contractual agreement under which a certain amount agreed upon ahead of time can be withdrawn. Lines of credit are generally secured by inventory and receivables, which are short-term assets. This reflects a general matching of the durations of the liability and the asset that is being used as collateral. Wholesalers, distributors, retailers and manufacturers most commonly employ lines of credit.
A line of credit is a form of short-term financing that is a component of working capital. Working capital is short-term capital used to fund a company's daily operations.
The Financial Accounting Standards Board recognizes a variety of line of credit items as liabilities on the balance sheet, many of which are short-term liabilities. The FASB defines a liability as an unconditional promise to provide or forgo economic resources, a requirement that is enforceable by legal or equivalent means. Even if a line of credit has not been drawn upon, it may still be recorded as a short-term debt instrument, which meets the criteria for being classified as a liability.
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