An asset which can be easily transformed into cash in less time and with no loss or little loss in value is known as a liquid asset. Liquid assets are usually compared with cash as the value remains the same whenever sold. These type of asset is commonly used by businesses and buyers.
There are many factors that a liquid asset should have. Few are mentioned below.
- The asset should be in an organized market
- It should have a large number of interested customers
- The ownership of the asset should be easily transferable
List of Liquid Assets
The different liquid assets that are more liquid, easily transferable, and available in the well-established market are:
- Cash in Hand
- Cash in Bank
- Cash Equivalents
- Accrued Income
- Promissory Notes
- Government Bonds
- Marketable Securities
- Account Receivable
- Certificates of Deposit
- Tax Refunds
Liquid Asset Formula
Marketable Securities + Cash – Current Liabilities
Liquid Assets Example
- Investments – Investments are considered to be liquid because it can be easily liquidated. For example, bonds, mutual funds, stock’s share, and money market funds are a few examples of investment liquid asset. Such assets are converted into cash very easily whenever there are any financial crises.
- Cash – It is an asset that can be accessed very easily and quickly. Since money is regarded as a legal tender, any company can use cash to pay for its existing liabilities. Any cash in hand or account is considered to be liquid because it can be taken out quickly without any formalities.
Analyzing Liquid Assets
In business, it is essential to manage both external reporting and internal performance. An organization that has more liquid assets have a massive capacity of repaying a debt as they become overdue.
Businesses have strategic methods for maintaining the cash on their balance sheet, which is used to pay bills and keep necessary expenditures. Banking industries have urgent cash and cash equivalents to abide by industry rules.
Liquid assets can be analyzed by several ratio analysts, commonly known as solvency ratios. The most familiar are the current ratio and quick ratio.
In the current ratio process, current assets are utilized to evaluate a firm’s capacity to pay its current liabilities with all the available current assets. Similarly, a quick ratio is deployed to cover the company’s current liabilities only with the liquid assets. In the quick ratio format accounts receivable are also included.
The above mentioned is the concept that is explained in detail about liquid assets. To know more, stay tuned to BYJU’S.