If you are just starting out in Accounting or Commerce, you will come across many terms. Good examples of the terms are current ratio and quick ratio because they are applied in working out assets as it concerns certain circumstantial ratios. It gets even more interesting if you have to spot the difference between current ratio and quick ratio. One promise you will get from us is that this guide will break it down for you. However, it is crucial we start the guide by defining the terms before distinguishing between the two concepts. Doing so will help you grasp it even quicker.
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Definition of Current Ratio
The current ratio is simply the proportionate value between existing assets and liabilities. Every organization that wishes to maintain a positive vibe with its creditors must have a high current ratio. When that happens, the creditors are easily impressed. Another advantage that it brings is that every organization that knows its current ratio can easily tackle its short-term liabilities. In other words, the business can determine its liquidity and ability to repay its short-term debts. According to experts, the ideal figure should be 2:1. This means that the business’ asset value is twice that of its liability. In clear terms, creditors often look forward to that figure because it is a strong indication that the firm can repay their credits. However, there is a caveat. When the figure is extremely high, the impression the firm makes is that it is using its belongings the best possible ways, meaning that the investors won’t have high returns as expected.
Definition of Quick Ratio
The quick ratio is the capacity of a company to liquefy its assets so as to clear its outstanding debts. Put simply, it is the ratio between the next liquefiable valuables or investments to the existing liabilities. This concept is also crucial in managing companies. The idea behind it is that it focuses on those assets that can be converted into liquid cash in a split second. This makes perfect sense because it becomes pretty uneasy to evaluate certain valuables when the company runs into a deep financial crisis. According to experts, the ideal figure ought to be 1:1. It is worthy to note that a business whose quick proportion is less than ONE won’t be able to repay its debt. Also, it is known as the acid-test ratio because it is pretty good to obtain a fast result from it. Because it focuses on valuables that can be liquefied, the concept is considered a conservative technique for measuring a firm’s financial position. At this point, we will use a table to walk you through the difference between quick ratio and current ratio.
Main Differences between Current Ratio vs Quick Ratio
To fully grasp the quick ratio vs current ratio concept, go through the table carefully.
S/N Basis of comparison Current Ratio Quick Ratio
- Meaning This figure represents the proportion of the existing valuables to the liabilities of a business This is the proportion of valuables that can be turned into liquid cash to the existing liabilities
- Relevance It is not depended upon the times of sudden crisis This helps a company to assess its ability to repay its debts.
- Ideal figure The idea figure here is 2:1 The idea figure here is 1:1
- Formula Current Assets/Current liabilities Quick or liquid assets/current liabilities
- Result The result obtained here shows if a business is capable of meeting its debt obligations or not The result shows how ready a company is to discharge recent cash requirements
- Timeframe The timeframe is often within one year The timeframe is undefined
In conclusion, it is clear that this guide will be incomplete without a recap of what the concepts stand for. While this article on current ratio vs quick ratio has been an interesting read, one must note that they are important techniques for assessing the financial status of a business. However, the former on an organization’s capacity to meet its debt obligations while the latter emphasizes a firm’s ability to discharge its immediate financial needs by converting its valuables to liquid cash. Finally, that is the most significant disparity between them.