A liability is a debt that a business owes. Liabilities are one of the five types of accounts and are shown on the balance sheet. They are included in the accounting equation where assets equal liabilities and equity.
- Liquidity is the concept of nearness to cash. Cash is a liquid asset. Marketable securities are liquid because they can be converted to cash quickly. Land is illiquid because it may take months to sell.
- Liquidity for a company is the ability to pay cash to meet current debts when due. This is also called solvency.
Liquidity ratios are financial ratios that show a company’s ability to pay debts in the short term. Liquidity relates to the ease of converting an asset into cash. Liquidity ratios focus on a company’s balance sheet. The liquidity ratios are:
- net working capital
- current ratio
- quick ratio
- cash ratio