Question

Adjusting entries, closing entries, and the final financial statements are the end of the line for the company's financial statements for a given period. A company will often adjust their long-term assets and liabilities for a current portion that will be reclassified on the financial statements. For example, a mortgage payable can be for 30 years, only one year is current. When the company is preparing their financial statements, the discussion of liquidity comes to the forefront. The most liquid assets (easily converted to cash) would be listed first and the lower liquid assets would be listed in order. The same holds true in the liabilities section, the sooner the company must pay out something, the closer to the top of the liabilities section it will be listed.

What tools can you use to remember account liquidity?

Answer 1

Liquidity of a particular account is based time period of connversion into cash. The tools which can be used is how quickly the account can be converted into cash.

In case of an asset, those which can be converted into cash within a shorter period of time is said to be more liquid.

For example: Marketable securities can be converted into cash more quickly than the inventories or accounts receivable.

In case of liabilities, those which are to be paid earlier are arranged on top and those payable later are presented in order.

For example: Trade Payable is show above Long term Loan as Trade payable are to be paid within the next operating cycle whereas the Long term loans are to be paid relatively late in point of time.