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:

  1. Determine your quick assets.

    Cash + Debtors (Accounts Receivable) + Marketable securities = Quick assets

  2. 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.

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