What is accounting liquidity?
Accounting liquidity is the measure of a debtor’s ability to pay their debts as and when they are needed, using the assets that are available to them. These assets will need to be liquid assets.
Where have you heard about accounting liquidity?
Whether they’re fully established companies or new start-ups, all businesses will have a knowledge of their accounting liquidity. Their ability to make profit, and therefore pay back loans and settle debts, is something that every valid loan offering institution will assess.
What you need to know about accounting liquidity.
Accounting liquidity refers to liquid assets – assets readily available as a means of payment. For example, cash is the most liquid asset, where as collectables and fine art (products that need to be sold to generate money) are among the least liquid assets.
Liquidity can be calculated using three different formulas. The Operating Cash Flow Ratio is where operating cash flow is divided by current liabilities, while the Current Ratio divides total current assets by total current liabilities. When using the Quick Ratio, inventories and pre-payments are deducted from current assets and then divided by current liabilities.