Order of liquidity - Financial definition
Financial acronyms
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Concise definition of the term order of liquidity
In accounting, the term order of liquidity describes the order of decreasing liquidity in which assets are presented in the balance sheet.
Comprehensive definition of the term order of liquidity
In a balance sheet, assets that take the least amount of time to be converted into cash into cash are presented first, those who take most time are listed at the end:
- Cash
No conversion is needed. - Marketable securities
Conversion into cash can generally be realized in a couple of days. - Accounts receivable
Convert to cash in accordance with the company's credit terms. Alternatively, they can be converted to cash immediately through factoring. - Inventory
Inventory could require multiple months to convert to cash. - Fixed assets
Conversion to cash depends on how active an after-market there is for these items. - Goodwill
Goodwill can only be converted to cash upon the sale of the company, hence it is listed last.