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Liquid Assets: Definition
If an asset is easy to sell or convert into cash without any loss in its value it is said to be liquid. For example, checking accounts and banknotes are the most liquid assets.
A liquid asset offers any individual or company access to cash at any time they want. It is advised that, at the time of investing, the investor should invest some amount in liquid assets. That is investors should have some liquid assets in their portfolio so that they can have an easy hand on their money during an emergency.
Cash is the most liquid asset followed by banking accounts, checkable accounts, short-term promissory notes, treasury bills, and other government bonds.
In short, liquid assets are assets that allow the holder of the asset easy access to cash. The holder of the liquid assets has the advantage of getting cash for the assets he holds as the liquid assets can be converted to cash within the shortest possible span of time. This allows the holder of liquid assets the power to look for any potential investment by disinvesting in the liquid assets he holds and making any probable investment in liquid or non-liquid assets.
Liquid assets also allow companies and individuals to meet the current needs that may arise from time to time. As the liquid assets are convertible to cash quickly, the entities holding liquid assets can meet short-term needs by using the liquid assets when the need arises.
Formula to Calculate Liquid Assets
The consolidated Liquid Assets are cash and marketable securities that can be readily converted to cash without considering the current liabilities.
𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = (𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑎𝑠ℎ) − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Examples of Liquid Assets
Examples of liquid assets consist of cash and investments.
Cash: The legal tender of cash is highly accessible and easily disposable. It can be utilized in real-time for paying any existing liabilities. Cash, whether available at a Bank or in hand, is considered to be the most liquid as it can be used immediately without any special formalities.
Investment: Some special types of investments can also be considered Liquid as they can be liquidated easily. In the case of any financial need, investments of certain types may be converted to cash quickly. Investments may be different types of instruments such as bonds, mutual funds, money market instruments, and stocks, among others.
List of Liquid Assets
Some of the most common liquid assets are the following:
Cash at Bank
Cash at a Bank is the sum of the money that is deposited in a bank or any other financial institution. It is considered to be a liquid Asset because it can be withdrawn and used whenever required.
Cash in Hand
Cash in hand refers to the accessible cash of an organization. In the context of a company, cash in hand helps in finding out the number of days for which an organization can carry on with its operating expenses with the available cash without having to rely on any other form of fund or investment.
Cash equivalents are securities that have a short-term maturity of 90 days or less. Examples of cash equivalent include legal tender, treasury bills, cheques that are received but not deposited yet, etc.
Governments usually issue debt security to raise funds. The government bondholder earns a fixed amount of interest against the amount invested in the bonds. This is a highly liquid asset because the payments are short-term in nature.
A promissory note, as the name suggests, is a financial instrument that has the written promise by an issuer to pay a specific amount of money to a payee on a determined future date. It creates a legal obligation on the issuer to pay the loan.
Accrued income refers to the form of money that has already been earned but not received yet. Interest earned on an investment in various instruments that have not been received is an example of accrued income.
Stock is an investment in company shares. It represents ownership corresponding to the volume of stocks owned in a company. With the increase in the value of stocks, investors can earn capital gains by selling the shares.
Account receivables are the proceeds or payments a customer of a company will have to pay for purchasing services or goods on credit. This is considered liquid because the payments must be made within a short period of time.
Importance of Liquid Assets
Liquid assets play a key role in the case of a company’s operations. It is important for companies to have a certain amount of liquid assets to meet the needs of the current operations of the company. As liquid assets show the amount of cash or cash equivalents, it shows the ability of a company to convert its assets into liquid form to meet the current or day-to-day operations of the company. Therefore, companies must save enough liquid assets in order to maintain a good position in short-term operations. A company with enough liquid assets, is, therefore, a healthy company in financial terms.
A liquid asset is a type of asset that can be easily converted into cash within a short span of time.
Liquid assets generally tend to be part of liquid markets with usually very high levels of demand and security.
Liquid assets are recorded in the current assets portion of the balance sheet of a company.
Business assets are usually divided using the quick and current ratio methods to find the liquidity types and solvency.
Some common examples of liquid assets may include cash, cash equivalents, marketable securities, money market accounts, short-term bonds, or accounts receivable.
Every company that has its presence in the market maintains a certain portion of liquid assets to run the company smoothly. It is inevitable that some unknown or unrecorded expense would come up while running a company and hence, the company would need to have liquid assets to meet its needs. That is not the only reason to manage a certain level of liquid assets. Companies need to manage many common and regular expenses with cash in their regular operations too. Therefore, liquid assets are important for one and all and hence they must be learned with great care.
Q1. What is meant by Cash at Bank? Briefly illustrate.
Ans. Cash at a Bank is the sum of the money that is deposited in a bank or any other financial institution. It is considered to be a liquid Asset because it can be withdrawn and used whenever required.
Q2. What is accrued income? Illustrate briefly.
Ans. Accrued income refers to the form of money that has already been earned but not received yet. Interest earned on an investment in various instruments that have not been received is an example of accrued income.
Q3. Investments can never be liquid assets. True or false?
Ans. False. Investments such as bonds, mutual funds, money market instruments, and stocks, among others are liquid in nature.
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