Liquid ratio expresses the relationship between liquid assets and liquid liabilities. This ratio is also known as quick ratio or acid test ratio. It is calculated by dividing liquid assets by liquid liabilities. Standard quick ratio is 1:1. This ratio indicate immediate solvency of enterprise. Unlike Current Ratio this is more qualitative concept. As it eliminates inventories, it is rigorous test of liquidity. This ratio is more important for financial institutions.
Liquid Ratio = Liquid Assets or Quick Assets/Quick Liabilities or Current Liabilities
Liquid assets is Current assets less (Stock, prepaid expenses and advance tax etc)
Liquid liabilities is Current liabilities less (Bank overdraft and cash credit etc)
To know more about Current Ratio, Current Assets and Current liabilities, read Current Ratio And It’s Formula/Calculation
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