What does "liquidation" mean in the context of financial accounting?

In financial accounting, "liquidation" refers to the process of converting a company's assets into cash in order to pay off its liabilities. This typically occurs when a company is wound up or ceases operations and needs to settle outstanding debts with creditors. The assets, which can include inventory, property, and equipment, are sold off or otherwise converted to cash. Following this, the proceeds from the liquidation are used to fulfill any creditor obligations before any remaining funds are distributed to shareholders, if applicable. This process emphasizes the priority of creditors over shareholders during the winding down of a business, ensuring that liabilities are settled before any potential returns to equity holders.