CBSE Class 12 Accountancy Partnership Ratio Analysis Chapter Notes

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Revision Notes for Class 12 Accountancy Part 2 Chapter 5 Accounting Ratios

Class 12 Accountancy students should refer to the following concepts and notes for Part 2 Chapter 5 Accounting Ratios in Class 12. These exam notes for Class 12 Accountancy will be very useful for upcoming class tests and examinations and help you to score good marks

Part 2 Chapter 5 Accounting Ratios Notes Class 12 Accountancy

Accounting Ratios
 
Accounting Ratio : It is an arithmetical relationship between two accounting variables.

Ratio Analysis : It is a technique of analysis of financial statements to conduct a quantitative analysis of information in a company’s financial statements.
“Ratio analysis is a study of relationship among various financial factors in a business.”- Myers
 
Expression of ration: Ratios are expressed in following four ways:
· Pure Ratio Like 2:1. All liquidity and solvency ratios are expressed in pure form.
· Percentage e.g. 15%. All profitability ratios are presented in percentage form.
· Times Like 4 times. All turnover ratios and Interest Coverage Ratio are presented in this form.
· Fraction like 3/4.
 
Classification or Types of Ratios:
 
Ratios can be classified into following 4 categories:
1. Liquidity Rations
2. Solvency Rations
3. Activity Rations also known as turnover Ratios or Performance Ratios.
4. Profitability Rations
 
IMPORTANT POINT
 
Note: For Calculation of ratios Formula must be written as it carries marks. Liquidity Ratios: These measure short term solvency, i.e. the firm’s ability to pay its current dues. In Liquidity Rations the following two ratios are included.
 
1. Current Ratio also called Working Capital Ratio.
2. Liquid Ratio also called Quick Ratio or Acid Test Ratio.
1. Current Ratio : It shows the relationship of current assets with current liabilities
Current Ratio =
 
Current Assets
 
An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle:
(b) it is held primarily for the purpose of being traded:
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.
 
The following items are include under Current Assets:
 
(a) Current investments
(b) Inventories
(c) Trade receivables (Debtors and Bills Receivables) after deducting any provision for
 
1. Debt Equity Ratio: It show relationship between Debts (Long term Liabilities or Non Current Liabilities) and Equity (Shareholders’ Funds).
Debt Equity Ratio =
Debts = Long-term borrowing + Long-term provisions
Equity/Shareholders’ Funds = Share Capital + Reserves and Surplus – Non – Trading Investments
 
OR
 
Equity/Shareholders’ Funds = Fixed Assets (Tangible and Intangible) + Non Current
Investment (Excluding Non Trading investment) +Long Terms Loans and Advances + Current
Assets – Current Liabilities – Long –term borrowings – Long – term Provision
 
1. Significance: It assesses the long term soundness of financial position of a business.
2. Ideal Ratio: 2:1 is considered as best but it should not be more than this.
2. Total Assets to Debt Ratio : It shows the relationship between Total Assets and Debts.
 
Total Assets To Debt Ratio =
 
Total Assets = Fixed Assets (Tangible and Intangible) + Non Current Investment (Excluding Non Trading Investment) + Long Term Loans and Advances + Current Assets Debts = Long-term borrowing + Long-term provisions
 
Significance: It measures the safety margin available to the providers of long term loans.
 
Ideal Ratio: No ideal ratio but a high ratio indicates higher safety to lenders and low ratio represents risky position.
 
3. Proprietary Ratio: It shows the relationship between Proprietors’ Funds/shareholders’ Funds and Total Assets of the business.
Proprietary Ratio = Proprietors’ Funds = Share Capital + Reserves and Surplus-Non Trading Investment

OR
 
Equity/Proprietors’ Funds = Fixed Assets (Tangible and intangible) + Non Current
investments (Excluding Non Trading investment) + Long Terms Loans and Advances +
Current Assets – Current Liabilities – Long – term borrowings – Long term provisions.
Total Assets = Fixed Assets (Tangible and Intangible) + Non Current Investment (Excluding
Non trading Investment) +long Term Loans and Advances + Current Assets
 
1. Significance: It measures the proportion of total assets financed by the Proprietors of the business. It shows the safety margin available to the lenders of the business as they can ascertain the portion of the shareholders in the business.
 
2. Ideal Ratio: No ideal ratio but a high ratio indicates higher safety to lenders and law ratio represents risky position from lender’s point of view.
 
4.Interest Coverage Ratio : This ratio establishes relationship between the Net Profit before Interest & Tax and interest payable on long term debts (Fixed Interest Charges)
Interest Coverage Ratio =
 
1. Since interest is a charge on profit, net profit taken to calculate this ratio is before interest & tax.
2. Objective & Significance-Objective is to ascertain the amount of profit available to cover the interest charge. It determines ease with which a company can pay interest expense on outstanding debt.
3. Parties interested in this ratio are debenture holders and lenders of long term credit.
4. High Ratio is better for lenders as it indicates higher safety margin.


Please click on below link to download CBSE Class 12 Accountancy Partnership Ratio Analysis Chapter Notes

Important Formulas
CBSE Class 12 Accountancy Important Formulas
Part 1 Chapter 01 Accounting for Not for Profit Organisation
CBSE Class 12 Accountancy Accounting For Not For Profit Organisations Notes Set A
CBSE Class 12 Accountancy Accounting For Not For Profit Organisations Notes Set B
Part 1 Chapter 02 Accounting for Partnership Basic Concepts
CBSE Class 12 Accountancy Accounting For Partnership Firms Notes
CBSE Class 12 Accountancy Goodwill Nature And Valuation Notes
CBSE Class 12 Accountancy Partnership Fundamentals Notes
CBSE Class 12 Accountancy Partnership Guarantee Of Profits Notes
Part 1 Chapter 03 Reconstitution of a Partnership Firm Admission of a Partner
CBSE Class 12 Accountancy Accounting For Partnership Firms Admission Of A Partner Notes
CBSE Class 12 Accountancy Accounting For Partnership Firms Fundamentals Notes
CBSE Class 12 Accountancy Reconstitution Of Partnership Notes
Part 1 Chapter 04 Reconstitution of a Partnership Firm Retirement/Death of a Partner
CBSE Class 12 Accountancy Retirement Or Death Of A Partner Notes
Part 1 Chapter 05 Dissolution of Partnership Firm
CBSE Class 12 Accountancy Dissolution Of A Partnership Firm Notes
Part 2 Chapter 01 Accounting for Share Capital
CBSE Class 12 Accountancy Accounting For Companies Notes
CBSE Class 12 Accountancy Accounting For Share Capital Chapter Notes
CBSE Class 12 Accountancy Accounting For Share Capital Notes
CBSE Class 12 Accountancy Implementation Of Schedule VI Of Companies Act Notes
CBSE Class 12 Accountancy Partnership Accounting For Issue Of Share Capital Notes
Part 2 Chapter 02 Issue and Redemption of Debentures
CBSE Class 12 Accountancy Accounting For Debentures Notes
CBSE Class 12 Accountancy Redemption Of Debenture Notes
Part 2 Chapter 03 Financial Statements Of a Company
CBSE Class 12 Accountancy Financial Statement Of Companies Notes
Part 2 Chapter 04 Analysis of Financial Statements
CBSE Class 12 Accountancy Analysis Of Financial Statements Notes
CBSE Class 12 Accountancy Partnership Common Size And Comparative Statements Notes
Part 2 Chapter 05 Accounting Ratios
CBSE Class 12 Accountancy Accounting Ratios
CBSE Class 12 Accountancy Partnership Ratio Analysis Chapter Notes
CBSE Class 12 Accountancy Partnership Ratio Analysis Notes
Part 2 Chapter 06 Cash Flow Statement
CBSE Class 12 Accountancy Cash Flow Statement Notes Set A
CBSE Class 12 Accountancy Cash Flow Statement Notes Set B
CBSE Class 12 Accountancy Partnership Cash Flow Statement Notes

CBSE Class 12 Accountancy Part 2 Chapter 5 Accounting Ratios Notes

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