What are Liquid Assets? Definition and meaning
Liquid assets, also known as quick assets, are current assets that can be quickly turned into cash (usually within a period of a month). The most liquid assets of all are bank notes (i.e. cash) and checking accounts.
These assets are considered to be nearly as liquid as cash and experience negligible changes in value/price when they are sold. There should be enough potential buyers in the market for this asset so that its price is maintained if it has to be sold.
A company that is rich in liquid assets is much more likely to be able to pay off its short term liabilities on time compared to those with low levels of liquid assets.
The most liquid of all assets are cash and checking accounts.
Gold and silver are liquid assets because they can easily be converted to cash equivalents.
Examples of liquid assets:
- money market instruments
- money deposited into a savings or checking account
- government bonds
- gilt edged securities
- demand and time deposits
- accounts receivable and inventories
Liquid assets are used in calculating liquidity metrics such as Current Ratio and Working Capital.
The 2013 Basel Accords define two different types of liquid assets: Level 1 Assets and Level 2 Assets.
– Level 1 Assets consist of highly-rated foreign sovereign debt, bank reserves, and domestic sovereign debt.
– Level 2 Assets are a little bit less liquid, including highly-rated corporate bonds and lower-rated foreign sovereign debt.
Liquid assets are included in several calculations to determine a company’s liquidity. A firm’s cash ratio, which is the total of all cash and cash equivalents divided by its short-term obligations, tells us whether it would be able to pay off its current liabilities with just its most liquid assets.
Current assets include all liquid assets plus other assets that can be converted into cash within one year.