Liquid assets are those assets which are easily and quickly convertible into cash with no or little effect on its value and the example of which includes the Cash which is the most liquid asset, accounts or bills receivable, certificate of deposit, promissory notes, any bonds of government, shares or stocks, marketable securities, any tax refunds etc.
Examples of Liquid Assets
The following liquid assets example provides an outline of the most common liquid assets. Assets that can be easily liquidated and converted into cash without any significant fall in its value are called liquid assets. They give the owner the comfort required since they are liquid in nature and can be easily sold in the open market to generate funds required for business operations or in a crisis situation.
In stock markets, the shares of the company in which there is a large number of buyers and sellers along with heavy volume in the day to day trading are termed as liquid stocks since the same can be easily traded thus restricting the brokers or other individuals to manipulate the stock price in their favor. In the balance sheet, they are reported under the head “current assets “with the most liquid asset at the top and less liquid assets at the bottom.
Most common examples of liquid assets are as follows –
- Cash
- Certificate of Deposits
- Marketable Securities
- Short Term Loans
- Accounts Receivables
- Bills Receivables
- Stocks
- Government Bonds
- Promissory Notes
Let us discuss each of the examples of liquid assets in detail –
Most Common Examples on Liquid Assets
Below are the Examples of Liquid Assets:
#1 – Cash
It represents the most liquid asset reported in the balance sheet. Cash refers to the bank balances of the company lying in the savings or the current account with banks along with the cash in hand with the petty cashier to meet the day to day conveyance and other petty expenses.
4.9 (1,067 ratings)
#2 – Certificate of Deposits
Is a certificate issued by a bank which has fixed maturity date and maturity amount for investment the surplus funds for a periodic interval?
#3 – Marketable Securities
These are investments in stocks, mutual funds, bonds, debentures, etc that are more liquid and can be redeemed off easily by selling it in the open market and generate funds for the company.
#4 – Short Term Loans and Advances
These are loans given to companies generally for less than 365 days to meet the short term liquidity. since they are given for a short tenure, the repayment of the same also happens very quickly.
#5 – Accounts Receivables
These are the payments that are due for the goods/services sold/rendered to the parties. They are considered as liquid assets since they can be easily realized into cash as per the term agreed upon by the debtor to pay back the money within a certain interval.
#6 – Bills Receivable
Is a debt instrument written by the seller and the acceptance by the buyer to pay a specific amount at a specific date in the future? they are liquid in nature since in case of urgency these bills receivables can be liquidated with a bank by taking a small haircut in the same.
#7 – Stocks
Some of the stocks in the share market are considered as liquid stocks since they can be easily sold in the open market without much fluctuation in the prices since there is a large number of buyers and sellers in the market who trade heavily in it thus reducing the chances of manipulation and malpractices.
#8 – Government Bonds
They are fixed coupon yield bonds issued by the government to the general public for subscribing. interest is been paid on the bonds on a semi-annually or annually basis depending upon the terms and conditions. since there is zero default risk here, they are termed as one of the most trusted liquid assets the company can have.
#9 – Promissory Note
Is a promise made by a person to other people to pay a specified amount on demand? It is typically unsecured but gives the owner a legal right to recover the money from the promissory in case of default. In this case, it becomes a liquid asset for the former since it can be easily transferred to any other party for a small fee.
Importance
Liquid assets form the most important component of the balance sheet since they strengthen the liquidity profile of the company and also give the comfort the business owner to run the operations of the company in a smooth manner. Below listed are some of the major points that need to be considered for the relevance of liquid assets.
- Extremely useful in a financial crisis situation since the business owner does not have the time and energy to sell his no-liquid assets which are of higher value.
- Quick access to the funds for meeting the day to day liabilities of the company like paying creditors, expense bills, salaries of the staff, etc which are unavoidable.
- Enhances the creditworthiness and the credit rating of the company since it gives comfort to the rating agencies that the company has sufficient amount of liquid cash available and can pay of the debt obligations in a timely manner without any stress on the company.
- Improves the financial ratios like current ratio, quick ratio, capital adequacy ratio and ultimately the net worth and the business valuation of the company which is required to arrive at the per share value.
Conclusion
Liquid assets for the most important part for an individual or a company since a sufficient amount of cash gives the person a comfort to run the operations smoothly without any hindrances.
- It is very much necessary for any company to have a strong liquid asset portfolio in order to meet the short term needs and repaying the debt obligations on time.
- In the case of start-ups, cash on hand plays a vital role since majorly all their investments are been deployed in the business growth and expansion leaving behind very fewer funds in case of a crisis situation.
- Further, it is also not advisable to lock the huge amount of funds in liquid assets since they are low-risk assets, the returns are also on the lower side. hence there should be a balance maintained by the company to the differential between liquid and no-liquid assets and decide upon the required fund allocation appropriately.
Recommended Articles
This has been a guide to Liquid Assets Examples. Here we discuss the top 9 Examples of Liquid Assets including cash, marketable securities, Certificate of Deposit, Stocks, Government Bonds, etc. Here are the other articles in accounting that you may like –
