Financial ratio: meaning

Let us make an in-depth study of the definition, importance and limitations of accounting ratios.

Definition of Accounting Ratio:

Ratio is a fraction whose numerator is the antecedent and denominator the consequent.

It is simply an expression of one number in terms of another. It may also be defined as the relationship or proportion that one amount bears to another, the first number being the numerator and the latter the denominator.

Another explanation of the ratio may be the relation of the latter to the earlier amount and computed by dividing the amount for the latter date or period by the amount of the earlier date or period.

Accounting definition in commerce

Accounting definition by aicpa

Nature of accounting

Importance of accounting

10 definition of accounting

(i) Pure ratio: e.g. a ratio between Debt and the Equity, say, 1: 1;

(ii) Ratio which refers to ratios ascertained with reference to time period—e.g., working Capital Turnover Ratio 3 times a year;

(iii) Percentage: e.g.—Net Profit of 20% on sales.

Importance of Ratio Analysis