What Is the Meaning of Liquid Cash?

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Cash is a primary asset in business. It is easily exchangeable for other goods and often is the medium most companies require for completing business transactions. A term associated with this medium is liquid cash. Companies and financial institutions use this term to describe the ease with which companies can move cash among transactions.

Defined

  • Liquid cash represents the most fluid asset a company can own. These items can include cash, demand deposits, time and savings deposits, and short-term saving accounts easily converted to cash.

Cash Equivalents

  • A company also may own items called cash equivalents. These items are not cash but easily can be converted to cash in a short time period. Common cash equivalents include Treasury bonds and money market funds through financial institutions.

Purpose

  • Companies retain cash or cash equivalents to pay bills whenever necessary. Rather than keeping copious cash amounts on hand, however, making small short-term investments allows a company to earn additional cash through interest. The money remains liquid while adding benefits to the company.

Reporting

  • The balance sheet contains all assets in a company. Cash and cash equivalents are often first in the current asset section. Current assets typically last less than 12 months in a company’s operations. Companies usually will list current assets in order of liquidity, hence the placement of cash and cash equivalents.

References

  • "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011
  • Photo Credit robertsrob/iStock/Getty Images
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