Accounting Ratios

Meaning of Accounting ratio

Accounting ratios also referred to as financial ratios, are applied to compute the performance and profitability of a firm grounded on its financial statements. They furnish a way of stating the association between one accounting data point to another and are the source of ratio analysis. To put it in other words, an Accounting ratio implies a quantitative agreement which is employed for the purpose of decision making and analysis. It furnishes the basis for intra-firm as well as inter-firm comparisons. Further, in order to make the ratios efficient, they are compared with ratios of base period or with the industry average ratios or with criteria.

Objectives of Accounting Ratio

Ratio analysis is a vital part of the analysis of outcomes unveiled by financial statements. It furnishes the users with essential financial data and points out the areas which demand research. Ratio analysis is a method which includes regrouping of information by utilisation of arithmetical associations, though its interpretation is a complicated concern. It needs a fine knowledge and the laws used for outlining the financial statements. Once it is done efficiently, it furnishes a lot of data which helps the analyst :

  • To be aware of the areas of the trade which requires more concentration
  • To know about the possible areas which can be developed with the effort in the solicited direction
  • To furnish a deeper analysis of liquidity, solvency, efficiency and profitability degrees in the trading concern
  • To furnish data for making a cross-sectional investigation by comparing the achievement with the valid business models
  • To furnish data procured from financial statements beneficial for making forecasts and estimations for the prospect

The above mentioned is the concept, that is elucidated in detail about the Accounting Ratios, its meaning and objectives for the class 12 Commerce students. To know more, stay tuned to BYJU’S.