Difference between Current ratio and Quick ratio

Current ratio and Quick ratio are both used to determine the ability of a business in paying off its current liabilities.

The main difference that lies between these two ratios is that while current ratio is focused on all the current assets including inventory, prepaid expenses etc., the quick ratio is focused more on items that can be immediately converted into cash.

Current ratio is calculated by dividing current liabilities with current assets. It includes all the prepaid expenses, inventory, cash and cash equivalents, etc that can be accounted for the current year.

Current ratio is also called the working capital ratio as it is related with making sure that the company is able to pay off its short term debts.

Quick ratio, on the other hand, is known as the acid test ratio, and does not include any inventory or prepaid expenses. It considers only those items that can be easily converted into cash or we can say items that are highly liquid in monetary terms.

Let us look at some of the points of difference between current ratio and quick ratio.

Current Ratio Quick Ratio
Definition
Current ratio is defined as the ratio that calculates the proportion between the current assets and current liabilities Quick ratio is defined as the ratio that calculates the proportion of most liquid current assets and current liabilities
Also known as
Working capital ratio Acid test ratio
Purpose
It is useful for finding the ability of the firm to meet its current obligations It is useful for determining the ability of a firm to meet any urgent requirement
Includes
All the current assets such as cash, cash equivalents, prepaid expenses, inventory, etc Includes only the most liquid current asset which can be cash and cash equivalents

This article was all about the topic of Difference between Current ratio and Quick ratio, which is an important topic in Class 12 Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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