Stricter Bookkeeping Methods: The Acid Test Ratio
Part of the Bookkeeping For Dummies Cheat Sheet (UK Edition)
Many lenders prefer the acid test ratio when deciding whether to give you a loan because of the test’s strictness. Stock isn’t included in calculating the ratio.
To calculate the acid test ratio you must do a two-step process:
Determine your quick assets.
Cash + Debtors (Accounts Receivable) + Marketable securities = Quick assets
Calculate your quick ratio.
Quick assets ÷ Current liabilities = Quick ratio
The following is an example of an acid test ratio calculation:
£2,000 + £1,000 + £1,000 = £4,000 (quick assets)
£4,000 ÷ £2,200 = 1.8 (acid test ratio)
Lenders consider a business with an acid test ratio around 1 to be in good condition. An acid test ratio less than 1 indicates that the business may have some difficulty settling its day-to-day liabilities.