Question

Why is it that long term assets must be financed by long term liability and Short term assets by short term liability? Actually I am asking the reason for the matching concept....

Answer 1

Thats the basic rule in capital budgeting. To give you a real example, Will you buy a car with your credit card ? The answer will be no. The reason is that payments are due in short term and there will be high interest rate rate when compounded. In business if long term assets are acquired by short term loans .There will be mismatch in the pay back and the business will collapse.