What Is the Definition of Liquid Asset? 

By  //  April 16, 2021

Share on Facebook Share on Twitter Share on LinkedIn Share on Delicious Digg This Stumble This

Liquid assets prove to have a high demand and high element of security within the liquid markets. You can quickly convert your liquid assets into cash with no loss of their value.

The balance sheets of most companies record liquid assets for the sake of accounting purposes. The most popular form of liquid asset is cash. Some other examples of liquid assets include,

■ Money in bank savings and checking accounts

■ Money Markets

■ Mutual Funds

■ United States Treasury Bills

■ Government Bonds

■ Stocks

■ Tax Refunds

■ Mortgages

■ Court Settlements

■ Trust Fund cash

■ C.D.s or Certificates of Deposit

■ Highly liquid assets are cash, cash equivalents, receivables from sales, long-term investments.

■ Accounts receivable

■ Inventory

■ The Foreign Exchange Market

■ A winning lottery ticket

Financial professionals say that you should have at least six to nine months of money saved in a checking or savings account as liquid cash that you can access immediately. You need a specific amount of money on hand to pay creditors when they come due.

A good share of your assets needs to be in other areas because liquid assets are what they are. The amount you have in liquid assets neither goes up nor down, and there is no flexibility in the price. You cannot earn anything from your cash on hand. Have you ever heard someone say the following?

“I am a millionaire. However, most of my cash is on paper and I do not have a penny in my pocket.”

This person no doubt has more non-liquid assets than liquid assets. This company needs more liquids assets and fewer non-liquid assets. These assets are difficult to sell, and if they do sell, it is not a quick sale. Examples of non-liquid assets are homes, properties, businesses, vehicles, and vacant land, to mention a few.

More liquid assets are essential to any business because they help to pay the debts when due. It takes a keen eye to manage balance sheets and ensure the strategy of keeping sufficient cash on hand and available to pay creditors. Some companies are bound by law to keep a required amount of money and cash equivalents on hand. Financial institutions fall into this category.

You can make various investments and keep these investments as liquid cash to convert them quickly if the need arises, however not as soon as cash. Some examples are stocks and securities, money markets, U.S. Treasuries, and bonds.

Any investment portfolio benefits when they hold liquid assets. Liquid assets are flexible enough so that if you see an investment you want to buy, all you have to do is use your liquid assets when you most need them. You do not have to sell other investments to get the money to buy at a moment’s notice.

An easy way to understand what liquid assets are is to think of currency you may have in your wallet. Cash speaks and is understood by everyone, everywhere, because cash is the legal tender. It is easier to complete a transaction when you use cash as your liquid asset.

Even though a credit card or check is the same as cash, you must go through a short process of showing your I.D. and others to make purchases. There is a possibility that your credit card is declined, or the system refuses to take your check for whatever reasons. There are no questions asked if you make your purchase with a liquid asset, such as with the cash you have on hand. The transaction is complete immediately.

Even though liquid assets are viewed as cash, you cannot take a money market, mutual fund, treasury bills, or government bonds to the store in exchange for goods. However, it does not take long to convert these assets into the money you need in the short future. Getting your cash for these things vary in the short time it takes.

■ Money Markets

■ Mutual Funds

■ United States Treasury Bills

■ Government Bonds

Liquid assets are vital for businesses because business owners go to their source of cash first when meeting payment obligations and deadlines. Non-liquid investments take about a year to convert to currency. Examples include but are not limited to land, real estate, equipment, and more. Another thing to realize is that non-liquid assets depreciate over time. The value decreases through the years, and they do not sell as quickly.

A Financial Call to Action

When dealing with private or business finances that entail liquid and non-liquid assets, indebtedness, bankruptcy laws, wage garnishments, and others, it is best to hire a Bankruptcy & Tax Resolution attorney who has a background in Certified Public Accounting.

It would be best to get and stay on a healthy financial path. Healthy finances are possible when you hire the right financial advisor fitting your particular situation and needs. This attorney looks at your liquid asset and your non-liquid asset and recommends how you can change things to benefit your financial future.

Leave a Comment