What are Liquid Assets?
Liquid Assets are the assets of the business which can be converted into cash within a short span of time and includes the assets such as cash, marketable securities, and money market instruments and they are shown on the asset side of the balance sheet of the company.
In simple terms, these assets can be transformed into cash rapidly, with a negligible effect on the price available in the entire market. Such assets comprise of government bonds and money market instruments. The foreign currency marketCurrency MarketFor those wishing to invest in currencies, the currency market is a one-stop solution. In the currency market different currencies are bought and sold by participants operating in various jurisdictions across the world. It is important in international trade and is also known as Forex or Foreign Exchange. is believed to be globally the highest liquid market across the world since a vast amount of money is being exchanged every day and thus, making it extremely difficult for a person to affect the worldwide exchange rate.
List of Liquid Assets
Savings account and cash are believed to be the greatest usual form of highest liquidity being owned by either individuals or businesses or both. However, several other assets are believed to be more liquid, easily capable of being shifted among the owners, and such assets that are well-established all through the market. Here is the complete list of liquid assets –
- Cash in Hand
- Cash in Bank
- Cash Equivalents
- Accrued Income
- Promissory NotesPromissory NotesA promissory note is defined as a debt instrument in which the issuer of the note promises to pay a specified amount to a party on a particular date.
- Government Bonds
- Marketable SecuritiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.
- Accounts ReceivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
- Certificates of DepositCertificates Of DepositA certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period.
- Tax Refunds
Example # 1
- The stock market is believed to be the perfect example of any liquid market as there exist vast numbers of sellers and buyers, coupled with several other stocks being examples of liquid assets.Examples Of Liquid Assets.Liquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet.
- Considering such an asset’s significant trading volume, some equitable securities might fast be transformed into cash. Such types of cases mainly exist for stocks having significant share volume and huge market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share..
- Since securities can be quickly sold through electronic markets at complete market prices while in demand, equitable stocks under correct circumstances are liquid;
Example # 2
- Cash on hand is taken as a liquid asset since its capability of being quickly accessed.
- Since cash being considered as a legal tender, any firm may utilize it to resolve its existing liabilities. Assume some company or any person has some cash in a savings or checking accountChecking AccountA checking account is a bank account that allows multiple deposits and withdrawals. Additionally, it provides superior liquidity..
- The account’s money is believed to be liquid since it can be taken out quite simply for settling liabilities.
Example # 3
- Investments are expected to be liquid as they can simply be liquidated.
- For instance, mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc, money market funds, bonds, and any stock’s shares are believed to be liquid. Such assets can readily be converted into cash whenever any financial emergency arises.
- Usually, investments can simply be sold, depending upon the investment.
Current Assets vs. Liquid Assets
- The list of Liquid assets comprises of Cash in Hand, Cash at the bank, marketable securities, other cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market.., accounts receivables, accrued incomeAccrued IncomeAccrued Income is that part of the income which is earned but hasn't been received yet. This income is shown in the balance sheet as accounts receivables., loans, and advances (short-term) and Trade Investments (Short Term).
- Current Assets include the above list and, also, have inventories and prepaid expensesPrepaid ExpensesPrepaid expenses are expenses for which the company paid in advance in an accounting period but which were not used in the same accounting period and have yet to be recorded in the company's books of accounts..
Consolidated Liquid Assets
Consolidated liquid assets are securities and cash that can readily be converted into cash, less current liabilities. Its formula is = Marketable Securities + Cash – Current Liabilities
- For example, let’s consider that Ford Motors, Inc. has $2 million in cash as depicted on its balance sheetIts Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., $600,000 of marketable securities as well as $4 million in current liabilities. Employing the above-mentioned formula, Ford Motors, Inc. it would be: $2,000,000 + $600,000 – $4,000,000 = -$1,400,000
- In the above example, Ford Motors, Inc. has negative liquidity, which signifies that if the company is asked to pay-off all its current liabilitiesIts Current LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. now, Ford Motors wouldn’t be able to perform such a task.
Holding sufficient cash on hand for paying off all the debts is a significant benefit to borrowers while comforting for lenders. Therefore, analysts employ this as an extremely stringent parameter of determining the company’s capability to successfully meet its near-term debt commitments.
Why are Liquid Assets essential for the business?
While evaluating investments, and considering one’s complete financial condition, liquidity might be a key factor. Essentially, liquidity considered to be any firm’s capability to easily convert any given asset into cash. Further, it is even the capability to purchase or trade any security leaving the asset’s price unaffected.
Overall, the liquid assets are of utmost importance to any individual or a company as it becomes convenient while making emergency debt repayments, purchasing equipment, hiring labor, payment of taxes, and several others. Therefore, any company or an individual willing to start a business or invest strategically needs immediate cash, which is only possible if the entity has readily available cash or such securities that would fetch cash upon easy liquidation.
Liquid Assets Video
This article has been a guide to what are Liquid Assets and its meaning. Here we provide a complete list of liquid assets and how it is different from current assets. You may have a look at these articles below to learn more about Accounting –