What is the Difference Between Current Assets and Liquid Assets?
Current Assets and Liquid Assets are both used to assess a company’s cash position and are also applied in the process of ratio analysis to compare with other related variables. They are similar, however, there is a slight difference between current assets and liquid assets.
Both current assets and liquid assets help determine the overall short-term financial situation and the ability of a company to repay its short-term commitments.
Current Assets
These are short-term assets owned and held by a company for 12 months (maybe less) or for a single accounting year. The intentions are to convert current assets into cash within a short period of time or to utilize them to pay off other current liabilities.
Examples of current assets include cash in hand, cash at bank, sundry debtors, short-term investments, bills receivable, inventory, prepaid expenses, etc.
- Current assets are shown separately as a line item in the financial statements.
- They include prepaid expenses and inventories.
- Current assets are used to calculate the current ratio of a business.
- In theory, they are liquid but practically current assets are not as easily convertible to cash as compared to liquid assets.
- Current assets are also known as circulating assets, circulating capital and floating assets.
Related Article – What is Super Quick Ratio?
Liquid Assets
are short-term assets which are considered highly liquid in nature. They are cash, cash equivalents and any other assets which can practically be turned into cash in just a few days.
Quick assets are calculated as;
Current Assets – (Inventory + Prepaid Expenses)
Inventory and prepaid expenses are excluded from liquid assets as they can not be converted into cash within a few days of time.
- Liquid assets are not shown separately in the financial statements.
- They do not include prepaid expenses and inventories.
- Liquid assets are used to calculate the liquidity or quick ratio of a firm.
- In theory and practically liquid assets are more liquid and quickly convertible to cash as compared to current assets.
- Liquid assets are also known as quick assets.
>Related Long Quiz for Practice Quiz 20 – Current Assets
>Related Long Quiz for Practice Quiz 27 – Liquid Assets
>Read Difference between fixed assets and current assets
