 # CBSE Class 12 Accountancy Commerce Liquidity Ratio ## CBSE Class 12 Accountancy Commerce Classes Liquidity Ratio

CBSE Class 12 Accountancy : In this article, we will explain Liquidity Ratio from Accounting Ratios of CBSE Class 12 Accountancy. As Takshila Learning is providing CBSE Class 12 Commerce Classes for CBSE Board Exam Preparation via HD-quality video lectures with detail explanation of the content by experienced faculties. Our best Faculties also provide articles/notes on important topics for your better understanding of the subject matter.

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Accounting Ratio is a numerical relationship between two accounting variables of financial statements. Accounting Ratio provides a deeper analysis of the liquidity, solvency, profitability and activity levels in the business. Through accounting Ratios know about the potential areas which can be improved with the effort in the desired direction. Accounting Ratios are classified from an objective point of view as Liquidity Ratios, solvency Ratios, activity Ratio, and profitability Ratio. In this article, we discussed Liquidity Ratio.

Liquidity Ratio

• Current Ratio or working Ratio or 2:1 Ratio

Current Ratio represents the relationship between Current assets and Current liabilities. Current Ratio is calculated by dividing Currents by Current liabilities on a particular date.

Formula: – Terms used in the formula:

Current assets– Current assets are those which will normally convert themselves into cash within one accounting year. Current assets include

• Current investments (Short-term investments, Marketable securities)
• Inventories (raw material, work-in-progress, stock of finished goods)
• Trade receivables (Debtors less provision)
• Cash and cash equivalents (Cash in hand, Cash at bank, Cheques, drafts on hand etc)
• Short term loans and advances
• Prepaid expenses, accrued income, advance payment of tax.

Current Liabilities – Current Liabilities are those liabilities which are likely to be paid within one accounting year. Current Liabilities includes:-

• Short term borrowings (Bank overdraft, Cash credit, Short-term loans and bank etc.)
• Trade payables (creditors and Bills payable)
• Outstanding expenses
• Income received in advance
• Unpaid or unclaimed dividends
• Interest accrued, and due/not due on borrowings,
• Calls-in-advance and interest thereon etc.
• Short term provision for tax
• Provision for dividend etc.

Objective and Significance of Current Ratio

The main objective of calculating the Current Ratio is to access the ability of the enterprise to meet the short-term obligations promptly.

A Current Ratio of 2:1 is generally considered to be acceptable. If the Current Ratio is more than 2:1, it is beneficial to the short-term creditors. If the Ratio is less than 2:1, it indicates a lack of liquidity and shortage of working capital

Observations

• An Increase in Current assets means an increase in Current Ratio
• A decrease in Current assets means a decrease in Current Ratio
• An Increase in Current liabilities means a decrease in Current Ratio
• A Decrease in Current liabilities means an increase in Current Ratio

For Examples of Current Ratios, Click here Accountancy classes.

II – Quick or Liquid or Acid test Ratio

The relationship between liquid asset and Current liabilities. Quick Ratio is computed by dividing liquid assets by Current liabilities.

Formula: – Terms used In Formula:

Liquid assets= all Current assets-Inventories-other Current assets (prepaid Expenses+payment of Advance tax)

Current liabilities = same as used in Current Ratio

Objective and Significance

The objective of calculating the Quick Ratio is to ascertain the short-term liquidity position of the enterprise. As liquidity implies the ability to convert Current assets into cash.

Generally, a Quick Ratio of 1:1  or more is considered to be good for the reason that it indicates the availability of funds to meet the liabilities 100%.

• An Increase in Quick assets means an increase in Quick Ratio
• A Decrease in Quick assets means a decrease in Quick Ratio
• An Increase in Current liabilities means a decrease in Quick Ratio
• A Decrease in Current liabilities means an increase in Quick Ratio

HD-quality recorded lectures for ‘Liquidity Ratios’, Solvency Ratios, Activity Ratios, profitability Ratios from ‘CBSE class 12 accountancy classes‘ is available here.

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