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Current Ratio: A Valuable Tool for Bookkeepers

Part of the Bookkeeping for Canadians For Dummies Cheat Sheet

Bookkeepers use the current ratio to compare the current assets of a business to its current liabilities. This ratio provides a quick glimpse of your business’s ability to pay its bills. The formula for calculating the current ratio is

Current assets ÷ Current liabilities = Current ratio

The following is an example of a current ratio calculation:

$5,200 ÷ $2,200 = 2.36 (current ratio)

Lenders usually look for current ratios of 1.2 to 2, so any bank would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because that indicates that the business doesn’t have enough current assets to pay its current bills.

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