Liquid assets are any assets that can quickly be converted into cash with a minimal impact on the asset’s value. In general, liquid assets are viewed in the same manner as cash, as their value remains largely the same when sold. In order for an asset to be considered liquid, it must be in an established market, with a large number of interested buyers, and with the ability for ownership to be transferred easily. This type of asset is the most basic used by consumers and businesses alike. To explore this concept, consider the following liquid assets definition.
Definition of Liquid Assets
- Any asset in the form of money, or that can be converted into cash quickly, with little or no loss in value.
1525-1535 Old French asez (“to have enough”)
What Are Liquid Assets
The term liquid assets refers to cash on hand, or other assets that can easily be converted into cash without losing much of the original value. Liquid assets are those assets the owner, whether an individual or entity, can turn into cash quickly during a financial emergency.
Examples of Liquid Assets
Cash and savings accounts are the most common type of liquid asset owned by people and businesses alike, but other assets considered to be liquid, are those that are established on the market and can be transferred between owners easily. Examples of liquid assets include:
- Certifications of deposit
- Accounts receivable
- Marketable securities
- Government bonds
- Promissory notes
- Tax refunds
Assets not considered to be liquid include real estate, venture capital investments, and collectibles. This is because the value of such items is likely to fluctuate greatly, especially if they are sold quickly. Additionally, ownership of such assets as real property cannot be transferred quickly. For example, if Evan sells his rental house to obtain quick cash when a major emergency arises, he is likely to receive less than the true value of the property, which results in a loss. Since the loss occurred, the rental house cannot be considered a liquid asset.
Other Types of Assets
Assets are the things owned by individuals or entities that have, or are expected to have, economic value. An individual or entity can be taxed on the value of its assets, and the assets left by someone who dies is referred to as his “estate.” Assets in such an estate may be used to pay debts left by the decedent, or distributed to beneficiaries as specified in the decedent’s will or trust. Assets come in a variety of forms, including tangible and intangible assets.
Tangible assets are physical in nature, and have a material value on the public market that can be easily ascertained. Tangible assets come with a risk of becoming damaged, lost, or stolen due to the acts of another person, or an act of nature. Tangible assets are either current or fixed (also referred to as “long term”).
Current assets are items that have a short useful life, usually less than one year. These include such assets as:
- Cash – includes bank accounts, checks, money orders, and coins
- Prepaid Expenses – includes prepaid insurance policies, prepaid travel, and the like
- Inventory – goods owned by a company in the business of selling those goods
- Supplies – items used in carrying on the company’s business, such as pepperoni and pizza boxes for a pizza restaurant
- Accounts Receivable – refers to money due to be paid for items sold to a customer, or services rendered
- Notes Receivable – includes promissory notes, and other promises to pay
Fixed, or long term, assets are items that have a long term value, and usually are not things a company or individual wants to sell, as they are required to do business. These include such items as vehicles, machinery, computers, and furnishings.
Intangible assets are the opposite of tangible assets, as they are not physical in nature. Intangible assets are things that do not have a clear face value, and must be reassessed from time to time to determine their current value. Intangible assets include such things as trademarks, patents, internet domain names, brand names, and even good will.
Assets, Liabilities, and Net Worth
Net worth is something of a snapshot into the financial health of an individual or entity. Net worth is the total value of an individual’s or entity’s assets, minus the total liabilities. Because these things are usually in a constant state of flux, net worth tends to change over time, as new assets are acquired, and debts or other liabilities are paid off. To calculate net worth, the individual or entity must first list all of their assets, with their values. Next, all of the liabilities are listed, with the total amounts of each. Liabilities include such debts or payments owed as credit card debt, mortgages, home equity loans, student loans, and car loans.
Finally, the sum total of liabilities is subtracted from the total value of assets to obtain the net worth.
Net worth = assets – liabilities
Related Legal Terms and Issues
- Asset – Anything owned or controlled by a person or company that is expected to have value
- Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
- Decedent – A person who has died.
- Probate Court – The section of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
- Real Property – Land and property attached or fixed directly to the land, including buildings and structures.