Liquid Assets Definition
Liquid Assets are the business assets that can be converted into cash within a short period and include the assets such as cash, marketable securities, and money market instruments. They are shown on the asset side of the company’s balance sheet.
These assets can be transformed into cash rapidly, with a negligible effect on the price available in the entire market. Such assets comprise 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 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.
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Liquid Assets Explained
Liquid Assets are those categories of assets that can be changed into cash within a very short period of time. They are the ones that companies as well as individuals access when they urgently need funds for emergency purpose or has to meet daily expenses which are small in value but almost regular in nature. Such expenses are usually those without which an entity will not be able to run smoothly, and operational process will come to a halt.
Such high quality liquid assets typically have a market that is also liquid and has a lot of demand. The buyers are readily available, and the market is an established one. They have very low level of risk and an ideal metric to evaluate the liquidity and solvency position of the entity and individual.
Some ideal examples of such high quality liquid assets include short-term bonds, cash and cash equivalent, money market instruments, accounts receivable, etc. Using these financial instruments, the holder can easily acquire cash by giving them away. However, the transfer of ownership should take place in a secured platform and buyers and sellers should be able to easily access it.
Overall, liquid assets are of utmost importance to any individual or a company as it becomes convenient. At the same time, make emergency debt repayments, purchase equipment, hire 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.
List Of Liquid Assets
Savings accounts and cash are believed to be the greatest usual form of highest liquidity as a total liquid assets 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
Liquid Assets Video
Let us understand the concept of total liquid assets with the help of some suitable examples.
Example # 1
- The stock market is 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 quickly be transformed into cash. Such cases mainly exist for stocks with 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 it can be quickly accessed.
- Since cash is considered a legal tender, any firm may utilize it to resolve its existing liabilities. Assume some company or person has some cash in a savings orA checking account is a bank account that allows multiple deposits and withdrawals. Additionally, it provides superior liquidity. 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 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 fundsMoney Market FundsA money market fund is a form of short-term debt security or open-ended mutual fund with a shorter maturity, offering good returns at high liquidity and low credit risk. The instruments it invests in include US Treasury bills, bank debt funds, and corporate commercial papers that could be taxable or free from tax., 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 be sold, depending upon the investment.
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 to pay off all the debts is a significant benefit to borrowers while comforting lenders. Therefore, analysts employ this as an extremely stringent parameter for determining the company’s capability to meet its near-term debt commitments successfully.
Why Are Liquid Assets Essential For The Business?
While evaluating investments and considering one’s complete financial condition, liquidity might be key. Essentially, liquidity is considered any firm’s ability to convert any given asset into cash easily. Further, liquid assets in balance sheet is even the capability to purchase or trade any security leaving the asset’s price unaffected.
Liquid Assets Vs Current Assets
- The list of most 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 refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period..
Liquid Assets Vs Fixed Assets
Apart from current assets, liquid assets can also be compared with fixed assets. Let us find some noteworthy differences between them as given below:
- The most important difference lies in the fact that the most liquid assets can be easily converted into cash or can be changed into cash form within a short period. But the latter is such that they cannot be done so.
- Corporates and individuals hold the former with the purpose of maintaining liquidity in their hands so that they can access them as and when needed. But the latter is held with the aim of getting its benefit for a long term, not to change it into liquid form easily.
- Common forms of the former is accounts receivable, cash or cash equivalent, short term bonds, etc. But the ideal examples of the latter are plant and equipment, land and building, furniture, vehicles, etc.
- The main purpose of the liquid assets in balance sheet immediate sale but the main purpose of the latter is long term benefit.
However, it is important to note that both are equally important for the organization and have their own purpose to serve. It is important that an entity maintains a balance between the two so that it can take the benefit of both as and when required.
This article has guide to Liquid Assets and its definition. We explain it with examples, vs fixed assets, list of them and vs current assets. You may have a look at these articles below to learn more about Accounting –