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Liquid assets mean those assets which can be converted into cash immediately without much loss.

**The above definition seems to define current assets. So what’s the difference between these two?**

One has to abstract the amount of inventories and prepaid expenses from the total amount of current assets to arrive at required figure.

### Formula for the calculation of Liquid Assets:

**= Current assets – (Inventory + prepaid expenses)**

Inventory and prepaid expenses are excluded from the scope of liquid assets because:

- Inventory can not be converted immediately into cash as and when required &
- Prepaid expenses cannot be converted into cash at all.

### Application of the formula:

Let’s suppose that XYZ Ltd has following figures on its balance sheet under the head ‘Current assets’

Using the formula and figures, we can calculate the total current assets as follows:

Total current assets | 1,15,000 |

Total amount of ‘Inventory’ and ‘Prepaid expenses’ | 22,000 + 5,000 = 27,000 |

Liquid assets = 1,15,000 – 27,000 = **88,000.**

Really good answer!