What is Liquidity In Accounting - Meaning - Explanation

Liquidity means that how much time a Current Asset takes to convert it into Cash. Cash Equivalents like Marketable Securities such as Shares, Commercial Paper, etc. are more Liquid Assets because they can be converted into Cash Very Quickly. Accounts Receivable, Short-term Investments also takes less time as compared to Inventory and Prepaid Expenses which take too much time to convert into Cash (usually it takes Month or Year).

As Business needs Cash to meet daily Expenses, so Liquidity Ratio is very important for the smooth running of the business. This ratio is suitable according to the industry in which the company is operating, like 2:1, then the company has more liquidity to meet its Current Liabilities or Short-Term Obligations.

So, Liquidity as a Financial Objective of a Company emphasizes on the Management is to have sufficient Cash in Hand to operate the business and meet daily running expenses without any delay.