Accounting liquidity

Short description: Measure of a debtor's ability to pay their debts as/when they mature

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Key concepts

* Accounting period
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Selected accounts

* Assets
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Accounting standards

* Generally-accepted principles
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Financial statements

* Annual report
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Bookkeeping

* Bank reconciliation
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Auditing

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People and organizations

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Development

* History
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In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay their debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities. Liquidity is the ability to pay short-term obligations.

## Contents

* 1 Calculating liquidity
* 2 Understanding the ratios
* 3 Liquidity in banking
* 4 See also
* 5 References

## Calculating liquidity

For a corporation with a published balance sheet there are various ratios used to calculate a measure of liquidity.[1] These include the following:[2]

* The current ratio is the simplest measure and calculated by dividing the total current assets by the total current liabilities. A value of over 100% is normal in a non-banking corporation. However, some current assets are more difficult to sell at full value in a hurry.
* The quick ratio is calculated by deducting inventories and prepayments from current assets and then dividing by current liabilities, giving a measure of the ability to meet current liabilities from assets that can be readily sold. A better way for a trading corporation to meet liabilities is from cash flows, rather than through asset sales, so;
* The operating cash flow ratio can be calculated by dividing the operating cash flow by current liabilities. This indicates the ability to service current debt from current income, rather than through asset sales.
* The Crisis Liquidity Ratio (CLR), defined as (Current Assets – Receivables) / Current Liabilities, is used in crisis conditions to reflect situations where inventories may be more liquid than receivables. It was proposed by Bulgarian economist Petar P. Petrov and has been applied in liquidity studies of the Bulgarian automotive sector.[3]

## Understanding the ratios

For different industries and differing legal systems the use of differing ratios and results would be appropriate. For instance, in a country with a legal system that gives a slow or uncertain result a higher level of liquidity would be appropriate to cover the uncertainty related to the valuation of assets. A manufacturer with stable cash flows may find a lower quick ratio more appropriate than an Internet-based start-up corporation.

## Liquidity in banking

Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of their depositors risks experiencing a bank run. The result is that most banks now try to forecast their liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators also view liquidity as a major concern.

## See also

Library resources about
Accounting liquidity

* * *

* Resources in your library

* Financial ratio
* Going concern
* Liquidity (disambiguation)
* Solvency

## References

1. ↑ "Liquidity - Definition, Example, Market vs Accounting Liquidity" (in en-US). https://corporatefinanceinstitute.com/resources/knowledge/finance/liquidity/.
2. ↑ Chen, James. "Liquidity" (in en). https://www.investopedia.com/terms/l/liquidity.asp.
3. ↑ Petrov, Petar P. (2018). "Cycle of Working Capital and Liquidity – Additional Analyses". https://www.researchgate.net/publication/328676712_CYCLE_OF_WORKING_CAPITAL_AND_LIQUIDITY-ADDITIONAL.

* v
* t
* e

Financial crises

* Banking panic
* Bear market
* Credit crunch
* Credit cycle
* Currency crisis
* Debt crisis
* Energy crisis
* Flash crash
* Hyperinflation
* Liquidity crisis
* Minsky moment
* Stock market crash

Pre–1000|

* Crisis of the Third Century (CE 235–284)

1000–1760|

* Great Bullion Famine (c. 1400–c. 1500)
* The Great Debasement (1544–1551)
* Kipper und Wipper (1621–1623)
* Tulip mania crash (1637)
* South Sea bubble crash (1720)
* Mississippi bubble crash (1720–1721)

1760–1840|

* Amsterdam banking crisis of 1763
* Bengal bubble crash (1769–1784)
* Crisis of 1772
* Dutch Republic financial collapse (c. 1780–1795)
* Panic of 1785
* Copper Panic of 1789
* Panic of 1792
* Panic of 1796–97
* Danish state bankruptcy of 1813
* Panic of 1819
* Panic of 1825
* Panic of 1837

1840–1870|

* Panic of 1847
* Panic of 1857
* Panic of 1866
* Black Friday (1869)

1870–1914|

* Panic of 1873
* Paris Bourse crash of 1882
* Panic of 1884
* Arendal crash (1886)
* Baring crisis (1890)
* Encilhamento (1890–1893)
* Panic of 1893
* Australian banking crisis of 1893
* Black Monday (1894)
* Panic of 1896
* Panic of 1901
* Panic of 1907
* Shanghai rubber stock market crisis (1910)
* Panic of 1910–11

1918–1939|

* Early Soviet hyperinflation (1917–1924)
* Weimar Republic hyperinflation (1921–1923)
* Shōwa financial crisis (1927)
* Wall Street Crash of 1929
* Panic of 1930

1945–1973|

* Kennedy Slide of 1962

1973–1982|

* 1970s energy crisis (1973–1980)
* 1973 oil crisis
* 1973–74 stock market crash
* Secondary banking crisis of 1973–1975
* Latin American debt crisis (1975–1982)
* 1976 IMF crisis
* 1979 oil crisis
* Brazilian hyperinflation (1980–1982)

1982–2007|

* Brazilian hyperinflation (1982–1994)
* Souk Al-Manakh stock market crash (1982)
* Chilean crisis of 1982
* 1983 Israel bank stock crisis
* Black Saturday (1983)
* Savings and loan crisis (1986–1995)
* Black Monday (1987)
* 1988–1992 Norwegian banking crisis
* Friday the 13th mini-crash (1989)
* Japanese asset price bubble crash (1990–1992)
* 1990 oil price shock
* Rhode Island banking crisis (1990–1992)
* 1991 Indian economic crisis
* 1990s Swedish banking crisis (1991–1992)
* 1990s Finnish banking crisis (1991–1993)
* 1990s Armenian energy crisis (1991–1995)
* Cuban Special Period (1991–2000)
* Black Wednesday (1992)
* 1992 Colombian energy crisis
* 1994 bond market crisis
* Venezuelan banking crisis of 1994
* Mexican peso crisis (1994)
* 1997 Asian financial crisis
* October 27, 1997 mini-crash
* 1998 Russian financial crisis
* 1998–99 Ecuador financial crisis
* Samba effect (1999)
* California electricity crisis (2000–01)
* Dot-com bubble crash (2000–2004)
* 2001 Turkish economic crisis
* 9/11 stock market crash (2001)
* Stock market downturn of 2002
* South American economic crisis of 2002
* 2002 Uruguay banking crisis
* 2003 Myanmar banking crisis
* 2000s energy crisis (2003–2008)
* 2004 Argentine energy crisis
* Nigerian energy supply crisis (2005–)
* 2007 Chinese stock bubble crash
* Zimbabwean hyperinflation (2007–)

2007–08|

* U.S. housing market correction (2006–07)
* 2008 Bulgarian energy crisis
* 2008 Central Asia energy crisis
* 2008 Latvian financial crisis
* 2008–09 Belgian financial crisis
* 2008–09 Russian financial crisis
* 2008–09 Ukrainian financial crisis
* 2008–2011 Icelandic financial crisis
* 2008–2011 Irish banking crisis
* 2008–2014 Spanish financial crisis
* European debt crisis
* Greek government-debt crisis
* Subprime mortgage crisis
* U.S. bear market of 2007–2009

Post–2008|

* 2009 Ecuador electricity crisis
* 2009 Dubai debt standstill
* Venezuelan banking crisis of 2009–10
* 2010 Flash Crash
* 2010–2014 Portuguese financial crisis
* Energy crisis in Venezuela (2010–)
* 2011 Tōhoku earthquake and tsunami stock market crash
* August 2011 stock markets fall
* 2011 Bangladesh share market scam
* 2012–13 Cypriot financial crisis
* 2013 Chinese banking liquidity crisis
* Venezuela economic crisis (2013–)
* Gaza electricity crisis (2013–)
* 2014–2016 Brazilian economic crisis
* Puerto Rican government-debt crisis (2014–)
* 2014–2017 Russian financial crisis
* 2015–16 Chinese stock market turbulence
* 2015–16 stock market selloff
* Zulia energy collapse (2015–)
* Brexit stock market crash (2016)
* 2016 Southeastern U.S. gas shortage
* Venezuelan hyperinflation (2016–)
* 2017 Sri Lankan fuel crisis
* Ghana banking crisis (2017–18)
* 2018 cryptocurrency crash
* 2018 Turkish currency and debt crisis

* List of banking crises
* List of economic crises
* List of sovereign debt crises
* List of stock market crashes and bear markets

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