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.
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.
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.
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:
Liquid Assets |
Fixed Assets | ||
1. |
Definition |
A liquid asset can be converted into cash easily. |
A fixed asset cannot be converted into cash easily and has a longer sales cycle. |
2. |
Purpose |
Used to deal with immediate monetary needs, in times of crisis, operational expenses, and cash flow needs. |
Used for the long-term functioning and growth of a company. |
3. |
Liquidity |
Highly liquidable (the degree of liquidity for different assets may vary). |
Not liquid (some assets may lose value over time). |
4. |
Accounting treatment |
Liquid assets are reported as per their current or fair market value on the balance sheet. |
Fixed assets are reported based on their historical value and are depreciated over time on the balance sheet. |
5. |
Maintenance |
Liquid assets are generally low maintenance. |
Fixed assets need to go through regular maintenance. |
6. |
Examples |
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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 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:
Consider the following image to get a better understanding of how current and noncurrent assets are placed on the balance sheet:
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.
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:
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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.
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.
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.
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.
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