1 What do you mean by liduidity oder of assets and liaibilities ? Explain with example.
Liquidity means convertibility into cash. Assets that can be converted into cash in least possible time, i.e., more liquid assets are recorded first, followed by the lesser liquid assets. For example, if a Balance Sheet is prepared with adherence to the liquidity order, then ‘Cash in Hand’ is recorded at first (top) and ‘Goodwill’ at last. In the same way, liabilities that are to be paid first, i.e., high priority liabilities are recorded first, followed by the lower priority ones. For example, in a Balance Sheet, ‘Current Liabilities’ are recorded first followed by ‘Long-term Liabilities’ and ‘Capital’ at the last.
Advantage – Balance Sheet based on the Liquidity Order provides better understanding about the liquidity of business and life of assets and liabilities in relative terms of time.
Balance Sheet of.................., as on................ | |||||
Liabilities | Amount Rs | Assets | Amount Rs | ||
(Most Liquid Liabilities) | (Most Liquid Assets) | ||||
Bills Payable | – | Cash in Hand | – | ||
Sunday Creditors | – | Cash at Bank | – | ||
Bank Overdraft | – | Bills Receivable | – | ||
Long-term Loans | – | Debtors | – | ||
Capital: (Least Liquid Liability) | Closing Stock | – | |||
Opening Balance | – | Long Term Investments | |||
| Add: Net Profit | – | (Least Liquid Assets) | ||
| Less: Drawings | – | – | Furniture | – |
Plant and Machinery | – | ||||
| Land and Building | – | |||
| Goodwill | – | |||
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