Stricter Bookkeeping Methods: The Acid Test Ratio - dummies

Stricter Bookkeeping Methods: The Acid Test Ratio

By Jane E. Kelly, Paul Barrow, Lita Epstein

Part of 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.