Ordering Accounts by Liquidity: A Practical Guide

Liquidity is an essential aspect of any business, as it affects the ability to access and use cash for operational purposes. In this article, we will explore different types of accounts and how to order them in terms of liquidity. This will help you make informed decisions about your company's financial resources.

1. Current Assets

Current assets are those that can be converted into cash within one year. They include items such as accounts receivable, inventory, and cash on hand. Current assets are typically the most liquid of all assets, as they can be used to meet immediate liabilities or operate the business.

Ordering current assets by liquidity:

a. Accounts receivable: These are funds owed to your company for goods or services provided. They are usually the most liquid current asset as collection is usually not problematic.

b. Inventory: Inventory is a mixture of liquid and illiquid assets, as some items may be sold quickly, while others may take longer to sell. Order inventory by value and then by most liquid items first.

c. Cash on hand: This is the most liquid current asset, as it can be used immediately to meet liabilities or invest in other activities.

2. Non-Current Assets

Non-current assets are those that have a long-term use or hold value. They include fixed assets such as property, plant, and equipment, as well as intangible assets like patents and licenses. Non-current assets are not typically liquid, as they typically require significant time and resources to sell or dispose of.

Ordering non-current assets by liquidity:

a. Long-term investments: These are investments with a holding period of more than one year. They typically include equity and debt securities, and their liquidation value is usually lower than their current market value.

b. Property, plant, and equipment: These are assets used in the daily operation of the business, such as buildings, machinery, and equipment. They usually require significant time and resources to sell or dispose of.

c. Intangible assets: These include patents, licenses, and trade names, which generally have a lower liquidation value than other non-current assets.

3. Liabilities

Liabilities are obligations that companies have to pay out funds to other parties. They include current and non-current liabilities.

Ordering liabilities by liquidity:

a. Current liabilities: These are liabilities that are due within one year, such as accounts payable, accrued expenses, and short-term debt. These are generally the most liquid liabilities, as they can be paid off quickly.

b. Long-term liabilities: These are liabilities with a holding period of more than one year, such as long-term debt and pension liabilities. These liabilities are typically less liquid than current liabilities, as they may require significant time and resources to pay off.

Ordering accounts and liabilities by liquidity is essential for managing financial resources effectively. It helps you identify the most liquid assets and liabilities, allowing you to make better decisions about funding, investment, and risk management. By understanding the liquidity of your assets and liabilities, you can better protect your company's financial health and success.