Current ratio shows the relation between current assets and current liabilities. We can know the short term solvency of the business unit.

Current Ratio =  \(\frac{Current \,Assets}{  Current\,Liabilities }\)

• Current Assets = Stock (except loose tools) + Trade receivables (After deducing bad debts reserve from Debtors and bills receivable) + Current investments + Cash on hand + Bank balance + Cheque and Draft on hand + Short-term lending and advances + Expenses paid in advance + Outstanding incomes.
• Current Liabilities = Trade payables (bills payable + Creditors) + Short-term borrowings + Interest payable on long-term liabilities + Due but not paid liability + Due but not paid interest + Outstanding expenses + Uncalled dividend + Instalments and income received in advance.
• On the basis of current ratio we can know the capacity of business unit to pay current liabilities and also about the cash and liquid situation of the business.
• Generaly 2: 1 proportion of this ratio is considered to be an ideal.