What are liquid assets?

What are liquid assets?

In economics and business administration, the term cash and cash equivalents refers to assets in the form of currency or scriptural money or other investments that can be converted into money in the very short term.

The term liquid refers to liquid: liquid assets can easily be moved and easily used for whatever goals they want: pay salaries, pay off debts, finance a project, purchase real estate or movable property, temporary investing, etc. A company always has a certain need for cash to be able to (continue to) meet short-term obligations. On the other hand, too much liquid assets are also not favorable because they generate less return than if they were invested or used in the company.

Typically, in the strict sense, it is cash, funds on current accounts or ordinary deposit booklets. In a broader sense, readily recoverable inventories are counted.

The iron stock and any strategic stocks are not liquid. Other items that are difficult to convert into money, such as sustainable investments, machines and real estate, are also not liquid. However, it is possible to liquidate non-liquid items or even an entire enterprise, and thus convert them into liquid assets. This almost always comes down to sales. Debt collection procedures and bankruptcy proceedings end in most legal systems with a forced liquidation of assets to settle the claim.
It may happen that there are also liquid liabilities (eg negative balances on a current account outside the framework of a cash credit). In that case, the difference between the liquid assets and liabilities is the net cash.

The degree of liquidity of assets or liabilities is linked to the term on which they can be realized (assets) or due and payable (liabilities). For example, receivables from customers (outgoing invoices) usually have a high liquidity (positive), just like the supplier debts (incoming invoices) (negative) – unless, in both cases, long payment terms have been agreed. But usually these invoices are not considered ultra-short, but short-term resources.

Rate this post:

Other posts of category "Accounting"