Current Ratio
What is the Current Ratio?
The current ratio is the ratio between current assets and current liabilities—showing the company’s ability to meet short term obligations.
How it Works
A business will have liabilities.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr2-1.jpg)
Liability accounts show how much money the business owes to other people, businesses, and organizations in total.
![cr3](https://seeaccountingnow.online/wp-content/uploads/2021/06/cr3-1.jpg)
However, management and analysts will be more interested in how much the business owes in the short term.
![cr4](https://seeaccountingnow.online/wp-content/uploads/2021/06/cr4.jpg)
This is known as current liabilities.
![cr5](https://seeaccountingnow.online/wp-content/uploads/2021/06/cr5-1.jpg)
Current liabilities show how much money the business must repay in the coming 12-month period (for more—see current liabilities)
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr6-1.jpg)
They will want to determine the business’s ability to meet this short term obligation.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr7-1.jpg)
To do this, they calculate the current ratio.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr8.jpg)
The current ratio is the ratio between current assets and current liabilities.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr9.jpg)
Current assets include cash and those assets that can be turned into cash within the coming 12-month period (for more, see current assets)
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr10.jpg)
To calculate the ratio, you divide current assets by current liabilities.
![cr11](https://seeaccountingnow.online/wp-content/uploads/2021/06/cr11.jpg)
The higher the ratio, the more likely the business will meet its short term obligations.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cr12.jpg)
© R.J. Hickman 2020