What is liquidation?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Liquidation is the formal winding up of a company, for example one that is insolvent. A person is appointed to stop the business operating, sell its assets and pay its creditors from the money raised, with anything left over going to shareholders. Liquidation applies to companies; for people who cannot pay their debts, the process is bankruptcy.
Liquidation and liquidity sound alike because both are about turning things into cash, but they mean different things. Liquidity describes how readily a trading business can turn what it owns into cash to meet its bills. Liquidation brings the company to an end: its operations stop, its assets are sold and the money raised goes to its creditors, with anything left over going to shareholders.
In bookkeeping terms, a company's records are the starting point for any winding up, because they show what it owns, who it owes and who owes it. A company whose books have fallen behind cannot easily show any of those things.
The word liquidate is also used more loosely, for example for selling off surplus stock quickly at low prices. On this site, liquidation means the formal winding up of a company.
In Australia
business.gov.au's glossary describes liquidation as winding up an insolvent company, with an appointed person stopping its operations, selling its assets and paying its creditors and shareholders. It defines liquidating as selling all of a company's assets quickly to turn them into cash.
Its page on managing business debt says sole traders and partnerships are subject to different arrangements from companies.
Common mistakes
- Using liquidation and liquidity as if they meant the same thing.
- Treating a stock clearance sale as a liquidation in the formal sense.
- Letting the books fall behind while the business is under financial strain, which is when an accurate picture of what it owns and owes matters most.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage being in debt
business.gov.au, Australian Government. Current at 16 October 2026, released 20 February 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.