In finance, the term liquidation denotes the process of converting an entity's assets into liquid assets that they can be easily transacted.
The term liquid, as used in finance, is used to denote assets which are widely accepted by a broad market base and are therefore easy to transact. Currencies which are in high demand are one form of liquid asset because they are accepted by most creditors and sellers. Certain securities, precious metals and other assets can be considered liquid because there is a strong and constant demand for them.
Illiquid assets, on the other hand, are assets for which there is a relatively low demand and a small market base. Illiquid assets typically include real estate, commodities, merchandise, vehicles, machinery and most other forms of assets which would not be widely accepted as payment for goods and services.
The liquidation process typically involves selling illiquid assets in order to trade them for cash. In investment, the term may be used to denote the process of converting illiquid investments such as alternative investments or illiquid securities which are difficult to sell into liquid investments such as securities which can be sold at any time due to high demand.
Liquidation is necessary for the purpose of debt repayment following bankruptcy. When a company or individual goes bankrupt, their assets must be converted into a liquid asset (typically cash) so that they can be distributed among their creditors. When a company’s assets are being liquidated for distribution to creditors after it has filed for bankruptcy, the company is said to be in liquidation.