What Are Liquid Assets? – Definition, Importance, Examples, And More

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What Are Liquid Assets - Definition, Importance, Examples, And More

What are Liquid Assets? – There are assets in business that you can convert to cash within a short period. These assets also include cash, money market instruments, and marketable securities. Such assets are called Liquid Assets. In a company’s balance sheet, you will find liquid assets on the asset side. Basically, you can transform a liquid asset into money fast, and there shall be a negligible price on the available price in the entire market.

For many people, it is hard to understand the Liquid Assets meaning. However, in this article, we will deliberate on liquid assets or liquid money and help you understand their importance for businesses as well as individuals. We will look at some examples of liquid assets and also learn the importance of having liquid assets in business. Hence, to learn in detail, read on through to the end of the article.

Contents

Liquid Assets Definition – What Are Liquid Assets?

According to Investopedia,

A liquid asset is an asset that can easily be converted into cash in a short amount of time. Liquid assets include things like cash, money market instruments, and marketable securities. Both individuals and businesses can be concerned with tracking liquid assets as a portion of their net worth.

At the time of financial accounting, a company reports its liquid assets on the portion of the current assets in the balance sheet.

Liquid assets act like cash in hand. Actually, money in cash form is considered the most liquid form of assets. This is because, as a legal tender, cash is the ultimate goal. Furthermore, you can convert any other liquid asset to cash fast.

Furthermore, the assets that you are converting to cash in a short time are also considered similar to cash. This is because the holder of the asset can easily get cash in exchange for the asset, and also in a fast manner. In many cases, people view liquid assets as cash, and hence, they are called cash equivalents. This is because the owner is confident that they can easily exchange the assets for cash at any time.

What Makes A Liquid Asset Liquid?

What Makes A Liquid Asset Liquid

To consider a liquid asset to be liquid, there are generally many factors one can consider. The asset must stay in an established, liquid market, and there shall be a large number of buyers readily available as well. Furthermore, the transfer of the liquid asset must also be secure, easy, and fast. However, the conversion of cash in some places might vary.

Those cash and securities that you can quickly convert and transact to cash are the most liquid assets. However, there are many other companies as well that consider those assets as liquid, which can be converted within one year or less. Nevertheless, generally speaking, liquid assets are the ones that you can convert to cash very quickly.

However, according to the Forbes Advisor,

It is important to recognize that liquidity and holding liquid assets comes at a cost. In general, the more liquid an asset is, the less its value will increase over time. Completely liquid assets, like cash, may even fall victim to inflation, the gradual decrease in purchasing power over time.

Examples Of Liquid Assets

A savings account and cash money are considered the greatest forms of liquid assets. The individual owner or the business owning the asset has the highest power of liquefying the asset. However, others also believe there are more types of assets that are even more liquid than those assets and can be easily shifted from owner to owner.

1. Stock Market

This is the most liquid market and consists of several buyers and sellers and many stocks that fall in the category of liquid assets. Provided the greater trading volume of such assets, you can transform some equitable securities into cash. However, this is only applicable to stocks with a high share volume and a big market capitalization.

2. Cash In Hand

You can quickly access cash in hand, and hence, it is one of the most liquid assets. Also, since such an asset is considered legal tender, a firm may utilize this asset to resolve existing liabilities.

3. Investments

An investment can be liquid, and it can be liquidated. Assets such as mutual funds, money market funds, shares, bonds, etc. can be considered liquid. You can convert such an asset into cash at times of any financial emergency.

The Importance Of Liquid Assets For Business

According to Wall Street Mojo,

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, it is even the capability to purchase or trade any security leaving the asset’s price unaffected.

It is important to have liquid assets because companies constantly need cash to meet their obligations, mostly the ones that are short-term. Without liquid assets, a company will not be able to pay its employees and vendors.

Although a company might not have a lot of cash in hand, it can still make sure that it has enough liquid assets that it can convert into cash at times of need. Then, they will be able to liquefy their assets easily.

The company needs to be mindful of its liquid assets if it wants to measure whether it can meet its short-term obligations. Furthermore, if a company is earning a lot of profits, then it might face some liquidity problems in relation to its assets if they do not prepare with its short-term resources.

Final Thoughts

What are Liquid Assets? I hope this article was helpful for you in getting a better understanding of what a liquid asset is. You can basically covert this asset into cash money rapidly. Due to high demand and security, these assets must have liquid markets. In a balance sheet, businesses keep liquid assets in the current assets area.

Some of the major examples of liquid assets include cash, equivalents of cash, marketable securities, money market accounts, accounts receivable, and short-term bonds. Do you have any more information to add regarding liquid assets? Share your thoughts and opinions with us in the comments section below.

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A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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