A Liquid Asset is a kind of asset that is easily convertible into cash in a short time. Cash, marketable securities, and money-market instruments are great examples of liquid assets.
Both Individuals and businesses are concerned about tracking their liquid assets as a share of their net worth.
Cash is the best option for any individual or a business in terms of liquidity. That’s why easily convertible assets are considered close to cash. In the time of need, these assets can easily be converted into cash for necessary transactions.
Conditions to Qualify as Liquid Asset
A few conditions determine whether an asset is a liquid or not and they are -
- Price stability (The established market of that asset)
- Ready marketability (A large number of readily available buyers in that market)
- Reversibility (Transfer of ownership must be secure and easily facilitated)
The time to convert the asset into cash will vary depending on the asset and the market associated with it.
Examples of liquid assets are cash or currency, bank accounts, accounts receivable, mutual funds, money market accounts, stocks, treasury bills, notes, and bonds, certificates of deposit, prepaid expenses, and retirement investment accounts.
Companies can also search for liquid assets with a cash conversion expectation of one year or less. These assets are collectively considered the company's current assets. This broadens the definition of liquid assets to include accounts receivable and inventory.
Overall, liquid assets are critical for individuals and businesses because they are the first source of cash used to meet payment obligations.
Use of this Term in a Sentence
- Cash and securities are two of the more popular and widely used liquid assets.
- Because of the flexibility to convert liquid assets into cash on short notice, these assets are often considered very similar to cash.
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