A business asset which is likely to be consumed within a financial year or a 12 months period is referred to as current asset.
An asset that can be readily or quickly sold for cash proceeds is known as a liquid asset. All assets can be sold for cash but liquid assets are those assets which do not require a substantial time to be converted into cash.
Current assets/Current liabilities
Quick Ratio or Acid Ratio:
Quick ratio is such a ratio which shows the comparison between all the liquid assets of an entity with all of its liabilities.
(Cash + Cash equivalents + Marketable securities + Accounts receivable)/Current liabilities
(Current assets – Inventories)/Current liabilities
Difference between current and liquid assets:
The main difference between current and liquid assets is give below:
1. Primary distinction:
- Current assets are those assets which a business plans to sell or consume in the span of twelve months or a single financial year. These assets are normally indulged in day-to-day activities of the business and are exhausted in result of normal operating cycles or throughput of the business.
- A liquid asset is such an asset which can be transformed into liquid cash in a short period of time. Some highly liquid assets such as treasury bills, money market funds, commercial papers are termed as cash equivalents and can sometimes be used instead of cash to settle business liabilities or purchase goods or services for the business.
Cash, cash in bank, prepayments, accounts receivables, short-term bank deposits, shares or bank notes, actively traded marketable securities, business inventories etc. are some examples of current assets. Cash equivalents which like marketable securities, money market funds, checks, short-term non-fixed bank deposits etc. are some examples of liquid assets. Many current assets except inventory etc. are liquid assets because they have a low conversion time.
3. Presentation on financial statements:
Current assets are shown in the section of assets under the head of current assets in the statement of financial position. They are written on the debit side of this financial statement according to the double-entry accounting principles. Current assets are also shown in the statement of cash flows. This statement usually deals with the inflow and outflow of cash within and from the organization. Among these stated assets, many assets in current assets and those highlighted in the statement of cash flows are liquid assets. Many jurisdictions allow the recording of current assets and liquid assets separately, but normally these assets are written under the same head.
4. Decision making:
The figures of both current assets and liquid assets are used to calculate the liquidity ratios of a business which are used to assess the ability of a business to meet its short-term cash needs. These ratios are normally called as liquidity ratios. There are two main liquidity ratios; current ratio and quick ratio.
|Extracts from Balance Sheet||Year 2 ,000||Year 1 ,000|
|Cash in Bank||$10,000||$10,000|
|Interest Payable on Bank Loan||$7,350||$7,350|
The liquidity ratios for both years would be:
Current Ratio = (6,000 + 10,000 + 5,800 + 12,000 + 3,450)/(13,200 + 7,350 + $1,300 + $5,700)
Quick ratio = (6,000 + 10,000 + 5,800)/(13,200 + 7,350 + $1,300 + $5,700)
Current Ratio = (4,250 + 10,000 + 6,000 + 8,900)/(12,600 + 7,350 + $1,010 + $2,780)
Quick ratio = (4,250 + 10,000 + 6,000)/(12,600 + 7,350 + $1,010 + $2,780)
The ratio shows the number of times J.P. Williams can cover their liabilities if the company has to hypothetically pay all its liabilities right now. In this example, these ratios show that the liquidity status of J.P. Williams & Company has declined in the second year. Although the current ratio has improved but it covers all the current assets while quick ratio, which has declined, covers only the liquid assets. A company must ideally maintain its current ratio at 1.5 and quick ratio at 1, but this may vary according to the relevant business or industry. This example, highlights how these figures can help management to gauge the financial (and indirectly financial) performance of their business.It must be noted that apart from inventory, prepaid expenses are also excluded from the calculation of quick ratio, because it is highly likely that these expenses were paid as advance of a certain contract and may not be cancelled to produce cash proceeds.
Current vs liquid assets – comparison table
|Feature||Current Assets||Liquid Assets|
|Primary distinction||Are assets that will leave the business in a span of 12 months or within a financial year.||Are assets that can be converted into liquid cash in a little span of time.|
|Examples||Cash in bank, accounts receivables, prepayments etc. are some examples.||Checks, bonds, debentures, shares, bank deposits etc. are some examples.|
|Classification in financial statements||These are classified on the debit side of balance sheet.||These are a part of current assets or can be written separately if allowed by the relevant jurisdiction.|
|Decision making||Can be used to evaluate the liquidity status of the company.||Highlights the level of liabilities cover of an entity by only liquid assets.|
Conclusion – current vs liquid assets
The maintenance of a healthy threshold of current assets is very important for an organization to sustain the level of its working capital. This decision also depends upon the level of current liabilities an entity has.The level of capitalization an entity plans to do directly affects the working capital needs of the company because robust working capital funds are necessary for an organization to stretch its growth plans without facing a shortage in its cash funds. However, amongst these current assets, a business must make sure it has sufficient amount of liquid assets which can cover the short-term liquidity needs of the business and can be exploited in emergency situations.