General

How to classify assets by liquidity

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What is asset liquidity Liquidity is those funds that can turn into money when sold. The degree is determined by the period (number of days) in which

they are transformed into cash. In the balance sheet (Form No. 1) they are presented in order of increasing degree of their liquidity, i.e. the smallest

are fixed assets, the largest – money. The slower the funds are converted into cash, the less liquid they are. In essence, it’s simple: the more time it

takes a company to turn a property into money, the lower the liquidity of that asset. And vice versa: the faster an asset can be sold, the higher its

solvency. Let’s compare, for example, finished goods, the result of the production cycle, and a car. Suppose, for example, the factory “Example” has a

batch of manufactured shoes and an unused vehicle (a 2000 passenger car) for sale. It is much easier and quicker to sell or turn goods into money

than to sell an old car. That is the main point of liquidity. The faster, the more valuable, and the more solvent the object is. A key indicator in

determining the liquidity of an asset is time. It all depends on the specific number of days (time interval) that it takes the company to sell the object

and receive money for it. The rate of turnover of the asset creates the main grouping of liquidity. All property and other assets of the firm are classified

into certain groups, depending on the rate of turnover. Classification begins absolutely or the most liquid assets – these are funds that can be instantly

extracted, such as cash in hand or finances in the settlement accounts of the organization. That is the money itself. The speed of their turnover is

minimal. You can get cash the day you go to the cash office or transfer payment for goods by money order from the current account. The owner of a

liquid asset does not waste time on “transforming” it into a solvent object, but simply pays with it. This basis is determined by the level of financial

and economic stability of the company and the degree of its solvency and efficiency of functioning.

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