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A company’s short-term financial obligations that need to be paid off within an accounting year are called Current Liabilities. These include short-term debts, accounts payable, dividends, notes payable, and taxes. These dues are usually settled with the help of current assets.
The ratio of current assets to current liabilities defines the ability of a company to settle its obligations due in that particular accounting year. This is called the current ratio. It is commonly used to understand the capabilities of a business in balancing assets and liabilities.
Another similar ratio to measure a firm’s ability to pay off debts is the Quick ratio. The only difference is that inventory is not included in the assets while calculating the ratio. The quick ratio is more conservative as it includes only the assets which can be easily converted into cash.
