Accounting Ratio – Meaning and Objective

Meaning of Accounting Ratio

A ratio is a mathematical relationship of two or more numbers and when these two numbers are taken from financial statements, this is called Accounting ratio.

Accounting ratio can be expressed as under:

1. Proportion (pure form): e.g.2:1, 1:1.

All current ratios and solvency ratios are expressed in pure form except Interest Coverage Ratio which is expressed in number of times.

2. Percentage e.g. 15%, 20%.

All profitability ratios are presented in percentage form.

3. Times e.g. 4 times, 3 times.

All turnover ratios are presented in no. of times. But average collection period and average payment period is expressed in number of days or months.

4. Fraction e.g. 3/4 or .75.

All solvency ratios are also presented in fractions except Interest Coverage Ratio which is presented in no. of times.

Objective:

The basic objective of ratio is the analysis of the profitability, liquidity, solvency and efficiency levels in the business to understand the strengths, weaknesses, making inter-firm and intra-firm comparisons for better understanding and decision making.