What is meant by liquidity in accounting terms?

Liquidity in accounting refers specifically to a company's ability to meet its short-term financial obligations as they come due. This concept is crucial for ensuring that a business can cover immediate expenses, such as accounts payable, payroll, and other short-term debts. A company that maintains good liquidity can effectively manage its cash flow and avoid insolvency, which is essential for day-to-day operations.

The measurement of liquidity typically involves the use of key financial ratios, such as the current ratio and quick ratio, which provide insights into the relationship between current assets and current liabilities. A strong liquidity position indicates that the company has enough liquid assets, such as cash or accounts receivable, to fulfill its short-term obligations without having to liquidate long-term assets.