Resources  ❯  Accounting Terms

Liquidity

[lih-KWIH-dih-tee]

What is the definition of Liquidity?
Liquidity refers to the ease with which assets can be converted into cash without significant loss of value. In the context of a corporation, it indicates the ability of the company to meet its short-term obligations using assets that can be quickly converted to cash, as measured by ratios like the current ratio, quick ratio, and cash ratio. In the context of securities, liquidity describes a high level of trading activity that allows for buying and selling with minimal price disturbance.
Using Liquidity in an Example

A company with high liquidity can easily cover its immediate financial obligations, such as payroll and supplier payments, by converting its liquid assets into cash. This capability is often reflected in strong liquidity ratios like the current ratio, which compares current assets to current liabilities.

Using Liquidity in a sentence

During the financial review, the CFO highlighted the company's improved liquidity, ensuring that they could handle unexpected expenses without disrupting operations.

Related Terms

LIFO

An accounting method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense, commonly referred to as 'Last In, First Out'.
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LIFO Liquidation

The process of reducing inventory levels at the end of the year to below the levels at the beginning of the year, specifically for businesses using the Last In, First Out (LIFO) inventory method. This often results in older, lower-cost inventory being sold, which can impact the cost of goods sold and subsequently, the company's profitability.
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LLC

A Limited Liability Company (LLC) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is formed by filing articles of organization with the appropriate state authority, and its regulations can vary by state.
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LLP

A Limited Liability Partnership (LLP) is a form of partnership where all partners have limited liability, protecting each partner's personal assets from the debts and liabilities of the partnership. Rules and regulations for LLPs can vary by state.
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Labor

Physical or mental effort exerted during work or tasks.
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Laissez-Faire

A doctrine advocating minimal governmental interference in the economic and business affairs of society.
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Land

A type of real estate that refers to the earth's surface extending downward to the center of the earth and upward to infinity, including permanently attached natural objects.
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Last In, First Out (LIFO)

An accounting method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense, commonly known as LIFO.
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Lay Off

In financial terms, to lay off is to reduce the risk in a standby commitment, where bankers agree to purchase and resell to the public any portion of a stock issue not subscribed to by shareholders who hold rights.
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Lease

A contractual agreement in which a lessor (the owner) grants a lessee (the user) the right to use an asset such as land, buildings, or equipment for a specified period of time in exchange for monetary or other consideration, typically in the form of rent.
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Lease Acquisition Cost

The total expenses incurred by a real estate limited partnership or similar entity when acquiring a lease, which includes the price paid for the lease, legal fees, and other related expenses.
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Lease-Purchase Agreement

An agreement that allows a portion of lease payments to be applied toward the purchase of the property being leased, potentially leading to ownership at the end of the lease term.
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Leasehold

A leasehold is an asset that provides the right to use and occupy property under the terms of a lease agreement.
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Ledger

A ledger is a book or collection of accounts in which account transactions are recorded, consisting of debit and credit entries.
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Ledger Account

A ledger account is a complete record of all the transactions pertaining to a specific account, providing a detailed history of financial activities over a period.
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Lender

An individual, firm, or financial institution that extends money to borrowers with the expectation that it will be repaid, typically with interest.
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Lending Securities

The process of borrowing securities from a broker's inventory, other margin accounts, or other brokers, typically to facilitate a short sale where the borrowed securities are delivered to the buying customer's broker.
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Lessee

A person or entity that has the contractual right to use an asset leased from another entity, known as the lessor, under the terms of a lease agreement.
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Lessor

An entity or individual that owns an asset and transfers the right to use this asset to another party (lessee) under the terms of a lease agreement.
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Letter of Credit

A conditional bank commitment issued on behalf of a customer to pay a third party in accordance with certain terms and conditions. Common types include commercial letters of credit, which facilitate international trade, and standby letters of credit, which guarantee payment in case of a default.
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Letter of Intent

A written document outlining the preliminary agreements or intentions of parties prior to a formal contract, often specifying actions contingent upon further negotiation and due diligence.
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Leverage

The use of borrowed funds or debt financing to increase the potential return of an investment. Leverage can amplify both gains and losses, making investments more sensitive to changes in the market.
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Leveraged Buy Out

A leveraged buyout (LBO) is a financial transaction in which a company is acquired using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired and those of the acquiring company are often used as collateral for the loans.
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Leveraged Lease

A financing arrangement in which a lessor uses borrowed funds to acquire an asset that is then leased to a third party, with the leased asset and lease payments serving as collateral for the borrowed funds.
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Liability

A liability is a financial obligation or debt owed by one entity (debtor) to another (creditor), which requires settlement through the transfer of money, goods, or services.
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Lien

A legal claim or security interest in one or more assets, held by a creditor to secure debt financing or ensure repayment of a debt.
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Life Expectancy

The age to which an average person is statistically expected to live, as calculated by an actuary, based on various demographic factors.
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Lifetime Learning Credit

A tax credit that allows taxpayers to claim 20 percent of qualified tuition and related expenses for higher education for themselves, their spouse, or dependents. This credit can be used for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills, available for an unlimited number of years.
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Limited Company

A business entity registered in jurisdictions such as the United Kingdom, where the company's owners are protected from full financial liability. The owners' liability is limited to the capital they have invested in the company.
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Limited Liability

A legal structure where the owners of a corporation are only financially responsible up to the amount of their investment in the company and are not personally liable for the corporation's debts and liabilities.
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Limited Liability Company (LLC)

A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is established by filing Articles of Organization with the relevant state authority, and its regulations can differ significantly across different states.
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Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a form of partnership where all partners have limited liabilities, protecting each partner from debts against the partnership arising from professional malpractice of the other partners. Rules and regulations for LLPs can vary by state, requiring registration with a state authority.
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Limited Partnership

A business structure where one or more general partners manage the business and are personally liable for partnership debts, while one or more limited partners contribute capital and share profits but their liability is limited to the extent of their investment.
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Liquid Assets

Assets that can be quickly and easily converted into cash without significant loss in value. These typically include cash, cash equivalents, and marketable securities.
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Liquidation

The process of winding up a company's financial affairs by selling its assets, settling debts, and distributing any remaining assets to shareholders. Liquidation occurs when a business ceases operations permanently.
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Liquidity Ratio

A measure of a firm's ability to meet its short-term obligations using its most liquid assets.
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Listed Property

Listed property refers to specific categories of assets for which tax deductions on depreciation are limited. These categories typically include passenger cars, property used for transportation, entertainment, recreation, amusement, computers and peripheral equipment, and cellular telephones.
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Litigation Support/Dispute Resolution

A specialized service provided by CPAs to assist attorneys in legal cases involving financial issues. This service includes expert testimony, forensic accounting, and the evaluation of financial documents to support legal arguments or resolve disputes.
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Loan

A financial arrangement in which a lender provides a sum of money to a borrower with the expectation that the borrower will return the amount over a specified period, often with interest.
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Loan Value

The maximum amount a lender is willing to loan, which is determined based on the assessed value of the collateral provided by the borrower.
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Long Bond

A bond that matures in more than 10 years, typically offering a higher yield to compensate for the longer investment period and associated risks.
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Long Term

In finance and accounting, 'long term' generally refers to a holding period or investment horizon that is one year or longer. It is often used in the context of capital gains taxation, where assets held for more than one year may qualify for lower tax rates.
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Long-Term Asset

An asset that is acquired for use in the operations of a business, has a useful life of more than one year, and is not intended for resale to customers.
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Long-Term Debt

Debt with a maturity of more than one year from the current date, typically used to finance long-term investments or projects.
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Long-Term Gain

A profit realized from the sale or exchange of a capital asset held for more than one year, subject to long-term capital gains tax, which is typically lower than the tax on short-term gains.
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Long-Term Investment

An investment that management intends to hold for a period exceeding one year, typically aimed at achieving long-term financial goals.
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Long-Term Liability

A debt that falls due more than one year in the future, or beyond the normal operating cycle, and is typically to be paid out of noncurrent assets.
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Long-Term Loss

A financial loss realized on the sale or exchange of an asset held for more than a year, which is the negative counterpart to a long-term gain.
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Loss

In accounting, a loss is the excess of expenditures over revenue for a period or activity, or in a transaction, it is the excess of the asset's basis over the amount realized.
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Loss on Disposal of Plant and Equipment

The financial loss recorded when a company disposes of plant and equipment assets for an amount less than their recorded book value.
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Lower of Cost or Market

An accounting principle that mandates certain assets be recorded at the lesser of either their historical cost or their current market value. This principle is applied primarily to inventory and other assets in situations where the market value has decreased below the cost at which the assets were originally purchased.
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Lump-Sum Distribution

A single payment to a beneficiary that covers the entire amount due under an agreement or settlement.
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