The current ratio and quick ratio are used in Commerce and Accounting. Both are the terms used to calculate current assets as a ratio to different terms.
Table of Contents
Current Ratio vs Quick Ratio
The difference between the Current ratio and Quick ratio is that the current ratio is the ratio between current assets and current liabilities whereas the quick ratio is the ratio between the nearest cash available and current liabilities.
Current ratio is the proportion between current assets and current liabilities. By calculating the current ratio of a company, its financial status is identified.
The quick ratio is also called an acid-test ratio. It is the proportion of most liquid current assets to the current liabilities.
|Parameter of Comparison||Current ratio||Quick ratio|
|Definition||The current ratio is the ratio between whatever current assets a person holds to the current liabilities he/she has.||The quick ratio is the ratio between the assets that can be converted to liquid cash, to the current liabilities.|
|Benefits||Current ratio calculates the ratio of all the assets and the liabilities; hence this cannot be depended upon when a sudden crisis occurs.||Quick ratio calculates the ratio between readily liquefiable assets and current liabilities; hence this cash can be a source to repay debts.|
|Efficiency||From the calculated current ratio, a company’s ability to solve short term liabilities is calculated.||By calculating the quick ratio, a company’s efficiency to overcome its present financial liabilities is calculated.|
|Example||If a company has assets of $10000 and liabilities of $5000|
Current ratio = $10000/$5000 = 2:1
|If the company has $2500 of inventory and supplies, then Quick ratio = 3:2|
What is Current Ratio?
A current ratio is the liquidity ratio from which the ability of a company to repay its short-term debts is calculated. The comparison between the current assets and the current liabilities gives this ratio.
When creditors try to invest in a company, they would prefer one with a higher current ratio since it explains the ability of the firm to repay the credit. But having a very large ratio is not encouraged as this shows that the firm is not using its assets in the best way, and the investors won’t be able to have high returns.
If the current ratio falls below 1, it indicates that the current liabilities are more than that of the assets. Hence it is not safe to invest in the company. Some companies which have inventory stocks can operate with a ratio below 1.
By analyzing the history of current ratios in many financial years, a company’s growth can be identified. It can also explain the different ways a creditor can expect his/her higher returns from the company.
What is Quick Ratio?
Quick ratio is the ability of a firm to liquefy its assets as soon as possible and repay the debts. It is the ratio between the nearest liquefiable assets to the current liabilities.
Quick ratio considers the assets which can be converted into liquid cash. This is more specific, since many assets cannot be valued when a sudden financial crisis arrives.
The quick ratio is also called an acid-test ratio. This is because of the quicker results obtained from this test.
The targets assigned by the company should be attained by the laborers to have a better quick ratio. If the amount to be invested in the company is delayed because of any situation, it affects the quick ratio and the company would be unable to meet its recent debts.
Main Differences Between Current Ratio and Quick Ratio
- The current ratio is the ratio between the current assets and current liabilities. The quick ratio is the ratio between near-cash assets and current liabilities.
- Since the current ratio calculates both liquefiable and in- liquefiable assets, it cannot be trusted when a sudden need occurs. Quick ratio uses the liquefiable assets to calculate the ratio and hence it can be used to repay sudden debts.
- The current ratio is the ability of a company to repay its short-term debts whereas a quick ratio is the ability to repay a company’s present liabilities.
- The ideal current ratio is 2:1 whereas the idea; quick ratio is 1:1.
- The current ratio is the amount that can be used in the long-term and quick ratio is the amount that can be used at any moment.
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️