What
are the various types of ratios?
What are the various types of ratios?
Accounting ratios are
classified in the following two ways.
I. Traditional
Classification
II. Functional
Classification
I. Traditional
Classification: This classification is based on the financial
statements, i.e. Profit and Loss Account and Balance Sheet. The
Traditional Classification further bifurcates accounting ratios on
the basis of the accounts to which the elements of a ratio belong. On
the basis of accounts of financial statements, the Traditional
Classification bifurcate accounting ratios as:
a. Income
Statement Ratios: These are those ratios whose all the
elements belong only to the Trading and Profit and Loss Account, like
Gross Profit Ratio, etc.
b. Balance Sheet
Ratios: These are those ratios whose all the elements belong
only to the Balance Sheet, like Current Ratio, Debt Equity Ratio,
etc.
c. Composite
Ratios: These are those ratios whose elements belong both to
the Trading and Profit and Loss Account as well as to the Balance
Sheet, like Debtors Turnover Ratio, etc.
II. Functional
Classification: This classification reflects the functional need
and the purpose of calculating ratio. The basic rationale to compute
ratio is to ascertain liquidity, solvency, financial performance and
profitability of a business. Consequently, the Functional
Classification classifies various accounting ratios as:
a. Liquidity
Ratio: These ratios are calculated to determine short term
solvency.
b. Solvency
Ratio: These ratios are calculated to determine long term
solvency.
c. Activity
Ratio: These ratios are calculated for measuring the
operational efficiency and efficacy of the operations. These ratios
relate to sales or cost of goods sold.
d. Profitability
Ratio: These ratios are calculated to assess the financial
performance and the financial viability of the business.
Accounting ratios are classified in the following two ways.
I. Traditional Classification
II. Functional Classification
I. Traditional Classification: This classification is based on the financial statements, i.e. Profit and Loss Account and Balance Sheet. The Traditional Classification further bifurcates accounting ratios on the basis of the accounts to which the elements of a ratio belong. On the basis of accounts of financial statements, the Traditional Classification bifurcate accounting ratios as:
a. Income Statement Ratios: These are those ratios whose all the elements belong only to the Trading and Profit and Loss Account, like Gross Profit Ratio, etc.
b. Balance Sheet Ratios: These are those ratios whose all the elements belong only to the Balance Sheet, like Current Ratio, Debt Equity Ratio, etc.
c. Composite Ratios: These are those ratios whose elements belong both to the Trading and Profit and Loss Account as well as to the Balance Sheet, like Debtors Turnover Ratio, etc.
II. Functional Classification: This classification reflects the functional need and the purpose of calculating ratio. The basic rationale to compute ratio is to ascertain liquidity, solvency, financial performance and profitability of a business. Consequently, the Functional Classification classifies various accounting ratios as:
a. Liquidity Ratio: These ratios are calculated to determine short term solvency.
b. Solvency Ratio: These ratios are calculated to determine long term solvency.
c. Activity Ratio: These ratios are calculated for measuring the operational efficiency and efficacy of the operations. These ratios relate to sales or cost of goods sold.
d. Profitability Ratio: These ratios are calculated to assess the financial performance and the financial viability of the business.
