Difference between Fixed Assets and Liquid Assets

Fixed Assets

Fixed assets are the long-term and tangible assets that get used within the operations of a business. They help in providing a long-lasting financial benefit to the firm. These assets have a useful life of more than a year, and they help a business generate revenue. Investors particularly look at these assets and their role in the firm when they want to decide on putting money in the business. They especially check things like the fixed asset turnover ratio to determine if these assets are efficient enough to generate regular income for the business.

Companies that are able to use their fixed assets in a more efficient manner tend to enjoy a competitive advantage in the market. Another reason why the firms must give more attention to the upkeep and maintenance of their fixed assets is that these items heavily impact the overall evaluation of the company. Some examples of fixed assets are as follows:

  • Land
  • Buildings and facilities
  • Machinery
  • Furniture
  • Vehicles
  • Computer equipment

Liquid Assets

A liquid asset is an item in a company’s balance sheet that can be securely sold within a limited time and converted into cash. Ideally, a liquid asset must be convertible to cash within ninety days to pay off for emergencies that may arise while running the firm. One important feature of these liquid assets is that they must not lose a significant portion of their market value on being sold. Every business entity takes short term loans which they need to pay off within three months to a year (sometimes even less than that). To take care of these problems, they often rely on such liquid assets, which act as a safety net for the organisation. Some examples of liquid assets are as follows:

  • Cash in hand/at bank
  • Account receivables
  • Money market accounts
  • Treasury bills
  • Mutual fund investments
  • Certificate of deposits
  • Bonds
  • Prepaid expense
  • Stock market investments

Difference between Fixed Assets and Liquid Assets

The main areas of difference between fixed assets and liquid assets are as follows:

Fixed Assets

Liquid Assets

Definition

Fixed assets are tangible assets that get used within the operations of a business and help in providing long-lasting financial benefit to the firm. These assets have a useful life of more than a year, and they help a business generate revenue.

A liquid asset is an item in a company’s balance sheet that can be securely sold within a limited time and converted into cash to pay off for emergencies that may arise while running the firm.

Convertibility to cash

It is relatively difficult to convert fixed assets to cash compared to liquid assets.

It is relatively easier to convert liquid assets to cash compared to fixed assets.

Valuation

Fixed Assets are valued by subtracting the depreciation amount (if applicable) from its cost.

Liquid Assets are valued by comparing their cost with market value and taking the lesser of the two values.

Financing

To purchase a fixed asset, a firm often opts for long term financing via existing funds/borrowing.

To purchase a liquid asset, a firm often opts for short term financing via existing funds/borrowing.

Holding period

The holding period for a fixed asset is more than a year.

The holding period for a liquid asset is less than a year.

Revaluation Reserve

There is a revaluation reserve created for a fixed asset in the event of its appreciation in price.

There is no revaluation reserve created for a liquid asset in the event of its appreciation in price.

Examples

Some of the examples of fixed assets are as follows:

  • Land
  • Buildings and facilities
  • Machinery
  • Furniture
  • Vehicles
  • Computer equipment

Some of the examples of liquid assets are as follows:

  • Cash in hand/at bank
  • Account receivables
  • Money market accounts
  • Treasury bills
  • Mutual fund investments
  • Certificate of deposits
  • Bonds
  • Prepaid expense
  • Stock market investments

Conclusion

It is important to understand that a firm requires both fixed assets and liquid assets to run its operations smoothly. Both these groups have different functions within the business, and they are also valued by the investors using different methods. But any enterprise needs to have the right sort of mixture of these asset classes to sustain their activities on a long term basis.

Frequently Asked Questions

Which of the accounting ratios are commonly used vis-a-vis liquid assets?

A firm mainly uses two accounting ratios: current ratio and quick ratio vis-a-vis liquid assets.

What are some of the factors that are important for a liquid asset?

Some of the most important factors related to a liquid asset are as follows:

  • The asset should be present in the organised market
  • The asset should be able to generate interest among a large number of customers
  • The ownership of a liquid asset has to be easily transferable

What is the formula for the calculation of Assets in a company?

The formula for the calculation of assets in a company is mentioned below:

  • Assets = Liabilities + Shareholder’s Equity

What are some of the main features of a fixed asset?

Some of the main features of a fixed asset are as follows:

  • The useful life of these assets is greater than a year
  • With the exception of land and property, all other fixed assets are liable for depreciation
  • These assets are useful in the company’s overall effort of producing goods and services
  • The fixed asset is a long term financial benefit in terms of the production of goods and services
  • It is not easy to convert these assets into cash in hand/at bank immediately

What is the total value of current assets of a firm if it has the following items: Rs. 40000 as cash in hand, Rs. 30000 as cash at bank, Rs. 5000 as prepaid expenses, Rs. 300000 as mutual fund investments, Rs. 2000 as the certificate of deposits and Rs. 40000 as bonds?

The total value of current assets is calculated below:
Current Assets = Rs. 40000 + Rs. 30000 + Rs. 5000 + Rs. 300000 + Rs. 2000 + Rs. 40000 = Rs. 417000

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