Accounting Liquidity

Accounting liquidity refers to a company’s ability to meet its short-term financial obligations using its current assets. It measures how easily assets can be converted into cash to pay off liabilities that are due within a year. High liquidity means that a company has enough cash or assets that can quickly be turned into cash to cover its short-term debts, while low liquidity indicates potential difficulties in meeting those obligations. The most common measures of accounting liquidity include the current ratio, quick ratio, and cash ratio, each of which assesses the relationship between current assets and current liabilities to evaluate the company’s financial health.

Example

A company with $200,000 in current assets (like cash, accounts receivable, and inventory) and $100,000 in current liabilities would have a current ratio of 2:1, indicating strong liquidity.