Difference between Current ratio and Quick ratio

Title: Difference between Current ratio and Quick ratio

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Meta Description: Current ratio and quick ratio are both useful in determining the firm’s ability to pay off the current liabilities. Learn more about the difference between current ratio and quick ratio here.

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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