Accounting Ratios – Definition

In general, ratio is an arithmetical relationship between two numbers of the same kind which may or may not be related to each other. When a ratio is derived from data brought from financial statements or other accounting information it is called an accounting ratio. It is usually expressed as a:b, a to b, a/b etc. It signifies arithmetic relationship between two accounting variables.

A ratio is simply “for every amount of one thing, how much there is of another thing”, for example say you have 9 Apples and 6 Oranges the ratio of Apples to Oranges will be 9:6 (equal to 3:2), which means for every 3 Apples you have 2 Oranges & Vice-Versa.

 

Four Ways of Showing Accounting Ratios

 

  • Percentage – This type of accounting ratio is shown in the form of a percentage.

For example,

Current Ratio = Current Assets/Current Liabilities

Lets say, current assets = 4,00,000 & current liabilities = 1,00,000

Current Ratio = 4,00,000/1,00,000 = 4/1 or if seen in percentage form it is (4,00,000/1,00,000)*100 = 400%

The above example shows that at the time of calculation current assets were 400% of current liabilities.

 

  • Pure – This type of accounting ratio is expressed in quotient form.

For example,

Current Ratio = Current Assets/Current Liabilities

Lets say, current assets = 4,00,000 & current liabilities = 1,00,000

Current Ratio = 4,00,000/1,00,000 = 4 or it can also be shown as 4:1

 

  • Fraction – This involves expressing a ratio in the form of a fraction or proportion.

For example,

Current Ratio = Current Assets/Current Liabilities

Lets say, current assets = 3,00,000 & current liabilities = 2,00,000

Current Ratio = 3,00,000/2,00,000 = 3/2, this is ratio in fraction form and it means for every 3 units of current assets the company has 2 units of current liabilities to be paid.

 

  • Times – In this type an accounting ratio is depicted in the form of ‘number of times” in comparison with a particular figure.

For example,

Current Ratio = Current Assets/Current Liabilities

Lets say, current assets = 3,00,000 & current liabilities = 1,00,000

Current Ratio = 3,00,000/1,00,000 = 3 Times

It shows relationship between current assets and current liabilities which is this case is 3 times. So, current assets are 3 times the current liabilities.

 

Accounting ratios can be expressed in any of the below formats.

Accounting ratios 4 types