6 Key Differences between Liquid Assets and Fixed Assets

Introduction

A lot of factors affect how businesses conduct their operations and allocate finances for the same. Amongst these factors are the assets that an organization owns. 

A business should own assets that can help meet immediate as well as long term financial goals. These financial assets fall under either one of the two categories – liquid assets and fixed assets. 

In this blog, we are going to talk about what liquid and fixed assets are, how they differ from each other, their accounting methods and how both of them fit into the financial planning process. 

What is a Liquid Asset?

Liquid assets are assets that can be easily converted into cash in a short period of time, without much hassle. A simple example of liquid assets is cash in hand that you may have put in a savings account. Also known as current assets, liquid assets are important as they provide immediate financial security and can be used in times of crisis. 

The liquidity of different assets vary depending on how quickly they can be converted into cash. Businesses usually consider assets that can be converted into cash within a short period of time (ideally within a year or less) to be liquid. Factors like the availability of a good number of buyers and sellers in the liquid market, the ease of transactions to convert an asset into cash, and the ability to convert assets into cash securely affect the liquidity of assets. Current assets are listed in a hierarchical manner based on their liquidity on the balance sheet. 

Examples of liquid assets

1. Cash and cash equivalents: Cash in hand or cash in savings and checking bank accounts is considered to be the most liquid asset. Other than direct cash deposits, cash equivalents are also highly liquid assets. These include treasury bills, certificates of deposit, and money market funds. 
2. Inventory and prepaid expenses: Inventory (goods available for sale) and prepaid expenses (payment made in advance for goods and services) are also considered to be liquid assets. However, they are not as liquid as cash and cash equivalents. 
3. Accounts receivable: In the case of businesses, accounts receivable fall under the liquid assets category. However, the take is a little controversial since the accounts receivable money is not always collected. The company does have a legal claim to the money that they are supposed to receive in the future, but there might be cases where it goes uncollected resulting in bad debt.

What is a Fixed Asset?

Fixed assets are tangible assets that have long-term value and are used to generate wealth over time. These assets cannot be turned into cash easily. Liquidating such assets is difficult, as you may not be able to find a buyer in a short span of time or you may not get the desired price of the asset in a limited period of time. 

For businesses, fixed assets directly impact the functioning of the company. Take, for instance, an equipment that a company owns that is used to perform regular tasks or a fleet of delivery vans. All such assets are critical to the functioning of the company and help them generate revenue over a long period of time. 

Investors and stakeholders tend to pay a lot of attention to a company’s fixed assets to determine if it’ll be able to function efficiently in the long-term. Due to all these reasons, it’s important for companies to regularly maintain their fixed assets. When it comes to the financial accounting of fixed assets, they are listed as noncurrent assets on the balance sheet and are depreciated. 

Examples of fixed assets

1. Real-estate: Any real-estate assets, including land, buildings, office spaces, parking spaces, etc., owned by an individual or a company, come under the fixed asset category. As you can imagine, it’s difficult to sell such assets quickly. However, they provide financial security for the future. 
2. Vehicles, machinery, and equipment: Vehicles and any other equipment owned by a company for official purposes are fixed assets. These assets are integral to the functioning of a company and take time to get liquidated. 
3. Intangible assets: Apart from tangible assets, a company or individual may also have intangible fixed assets like intellectual property, long-term investments, copyrights, and trademarks. These assets are important as they can help businesses gain better brand recognition and improve customer loyalty. 

How Do Liquid Assets Differ from Fixed Assets?

One of the key differences between liquid assets and fixed assets is their liquidity. Liquids assets can be converted into cash easily, while fixed assets are illiquid and cannot be converted as easily. Both types of assets are important for a business, however, the way they impact a business differs greatly.

Let’s deep dive into the major differences between liquid assets and fixed assets:

Which asset category should businesses prioritize? 

Both liquid assets and fixed assets have different purposes and are therefore important for a business to thrive. 

A company’s operational expenses are dependent on its liquid assets. Such assets help businesses meet any immediate monetary obligations and help them with cash flow management. Hence, businesses need to have a good amount of liquid assets if they want their operations to run smoothly. 

Fixed assets play a different role when it comes to the finances of a business, and that’s why they are just as important as liquid assets. If a company doesn’t have the proper infrastructure or the basic equipment required for its functions, it can’t grow and generate revenue. Investors pay a lot of attention to a business’ fixed assets since they indicate the financial health of the company. 

To sum it up, a company’s liquid and fixed assets directly affect its financial growth and strategic decision-making. In order to ensure that the day-to-day monetary expenses are met and long-term financial gains are created, it’s imperative that businesses have both liquid assets and fixed assets. 

Accounting for Liquid and Fixed Assets 

Accounting treatment for both liquid and fixed assets is different as they differ greatly in terms of how they financially impact businesses and their functions. 

Let’s take a closer look at accounting for fixed assets and liquid assets:

• Valuation method
  1. Liquid assets: These assets are valued at their current market cost or value. Cash, for example, is valued at the current cost, but accounts receivable is valued at the expected market value. 
  2. Fixed assets: Fixed assets are recorded at their historical market value, including the cost of making the assets useful.
• Depreciation and amortization
  1. Liquid assets: These assets are not subject to depreciation as they can be converted into cash within a year. 
  2. Fixed assets: Tangible fixed assets are depreciated over time to reflect their usage and wear and tear over time. Intangible fixed assets are amortized during the time period of their usefulness. 
• Placement
  1. Liquid assets: These assets are listed at the top of the balance sheet and are listed under the ‘current assets’ account. 
  2. Fixed assets: These assets are listed below current assets on the balance sheet under the ‘noncurrent assets’ account. 

  Consider the following image to get a better understanding of how current and noncurrent assets are placed on the balance sheet:

  

  Source

  As you can see, liquid assets like cash, accounts receivable, and inventories are listed under at the top of the balance sheet. These assets are then followed by noncurrent assets like property, plant and equipment, and intangible assets. 

  Note how assets are listed according to their liquidity; the most liquid assets (cash and cash equivalents) are at the top followed by assets that become less and less liquid as we move down. 

• Impact on financial metrics
  1. Liquid assets: These assets are important for calculating liquidity ratios, like quick and current ratios, which are required to measure if a company can meet short-term monetary obligations. Liquid assets are also a part of the working capital that further indicates the short-term financial health of an organization.
  2. Fixed assets: Noncurrent assets are used to calculate the turnover ratio, which measures the company’s ability to generate sales using its fixed assets. Any investments made in fixed assets come under capital expenditures and impact the long-term financial planning for a company. 

How Do Liquid and Fixed Assets Fit into Financial Planning?

To maintain financial stability, businesses should handle both their fixed and liquid assets smartly. We’ve already established that these two types of assets differ greatly, serve different needs for a business, and therefore fit differently into financial planning. 

Let’s take a closer look at how these assets help businesses fulfill their financial goals:

• Short-term and long-term financial goals
  1. Liquid assets: These assets help businesses take care of short-term financial obligations and also act as an emergency fund in case the need arises. 
  2. Fixed assets: Noncurrent assets specifically help companies reach their long-term financial goals and accumulate wealth. 
• Risk management
  1. Liquid assets: Since liquid assets can be converted into cash easily, they can help businesses mitigate sudden financial crises. Moreover, liquid assets are low-risk assets that don’t pose a sudden risk to a company’s financial stability. 
  2. Fixed assets: Fixed assets, while being high-risk commodities, offer long-term benefits. Investing in fixed assets can help businesses add a layer to their risk management solutions. 
• Cash flow management
  1. Liquid assets: By their nature, liquid assets effectively help businesses manage their cash flow better. A good example to consider is the cash flow through accounts receivable and accounts payable. Even if you are unable to collect some amount of cash, you have liquid assets that can be used to manage the company’s cash flow. 
  2. Fixed assets: These assets contribute towards generating wealth. Since fixed assets are subject to depreciation and amortization, they affect the cash flow statement and are listed as non-cash expenses. This, in turn, helps reduce the taxable income. 

How Can HighRadius Help 

HighRadius offers a cloud-based Record to Report that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.

Our Financial Close Software is designed to create detailed month-end close plans with specific close tasks that can be assigned to various accounting professionals, reducing the month-end close time by 30%.The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it. 

Our Account Reconciliation Software provides an out-of-the-box formula set that can configure matching rules and match line-level transactions from multiple data sources and create templates to automate various transaction processing required for month-end close. Our solution has the ability to prepare and post journal entries, which will be automatically posted into the ERP, automating 70% of your account reconciliation process. 

Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ throughout the financial period so that teams can avoid the month-end rush. The AI algorithm continuously learns through a feedback loop which, in turn, reduces false anomalies. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes.

FAQs

Q1. Are fixed assets considered current assets?

No, fixed assets aren’t listed as current assets on the balance sheet. They are reported as noncurrent assets, and their valuation is based on the historical price rather than the current or fair market value. The value of fixed assets is depreciated, unlike the value of current or liquid assets. 

Q2. Is a house a fixed or liquid asset?

A house comes under the fixed asset category. Any real estate property, like parking spaces or land, including houses, is considered a fixed asset. Some other examples of fixed assets include vehicles, machinery, and equipment. Fixed assets are usually tangible properties that cannot be easily exchanged for cash. 

Q3. Is a car a fixed or liquid asset?

A car, like any other vehicle, is a fixed asset. Much like any other tangible asset (including real estate, equipment, and machinery), vehicles come under the fixed asset category. These assets are reported as noncurrent assets on the balance sheet and help the business achieve its long-term financial goals. 

Q4. What are considered liquid assets?

Liquid assets are assets that can be converted into cash easily and are useful for short-term financial needs. They also act as emergency funds and are useful in times of financial crises. Some of the examples of liquid assets are cash and cash equivalents, mutual funds, bonds, and, in some cases, accounts receivable.