The smoothed particle hydrodynamics (SPH) method has been increasingly used to study fluid problems in recent years; but its computational cost can be high if high resolution is required. In this study, an adaptive resolution method based on SPH is developed for multiphase flow simulation. The numerical SPH particles are refined or coarsened as needed, depending on the distance to the interface. In developing the criteria, reference particle spacing is defined for each particle, and it changes dynamically with the location of the interface. A variable smoothing length is used together with adaptive resolution. An improved algorithm for calculating the variable smoothing length is further developed to reduce numerical errors. The proposed adaptive resolution method is validated by five examples involving liquid drops impact on dry or wet surfaces, water entry of a cylinder and dam break flow, with the consideration of ambient gas. Different resolution levels are used in the simulations. Numerical validations have proven that the present adaptive resolution method can accurately capture the dynamics of liquid–gas interface with low computational costs. The present adaptive resolution method can be incorporated into other particle-based methods for efficient fluid dynamics simulation.