Accounting Ratios Class 12 Notes: In this article, students can find complete handwritten revision notes for CBSE Class 12 Accountancy Chapter 5 Accounting Ratios. Since, the chapter lies in the second part of the Class 12 Accountancy NCERT textbook, the chapter can also be named CBSE Class 12 Accountancy Part 2 Chapter 5, Accounting Ratios. We have also attached a PDF download link at the bottom of the article for students who wish to save these short notes on Accounting Ratios, for future reference.
These Accounting Ratios revision notes have been brought to you by a team of Jagran Josh, after a thorough reading and analysis of the Class 12 Accountancy chapter Accounting Ratios. We have also considered the updated and revised CBSE Syllabus 2024 while preparing these short notes for you. These will guide you through the details and important concepts of the chapter and ensure that you do not miss out on any significant information that might be asked in the CBSE Board Exam.
Related:
CBSE Class 12 Accountancy Syllabus 2023-2024
CBSE Class 12 Accountancy MCQs
NCERT Solutions for Class 12 Accountancy
CBSE Class 12 Accountancy Chapter 2 Mind Maps
CBSE Class 12 Accountancy Chapter 1 Revision Notes
CBSE Class 12 Accountancy Chapter 2 Revision Notes
Revision Notes for CBSE Class 12 Accountancy Chapter 5 Accounting Ratios
What are Accounting Ratios?
A ratio is a mathematical number calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, and number of times. When the number is calculated by referring to two accounting numbers derived from the financial statements, it is termed an accounting ratio.
Objectives of Ratio Analysis
The objectives of ratio analysis are:
- To know the areas of the business which need more attention
- To know about the potential areas which can be improved with the effort in the desired direction
- To provide a deeper analysis of the profitability, liquidity, solvency, and efficiency levels in the business
- To provide information for making a cross-sectional analysis by comparing the performance with the best industry standards
- To provide information derived from financial statements useful for making projections and estimates for the future.
Advantages of Ratio Analysis
The advantages of ratio analysis are:
- Helps to understand the efficacy of decisions
- Simplify complex figures and establish relationships
- Helpful in comparative analysis
- Identification of problem areas
- Enables SWOT analysis
- Various comparisons
Limitations of Ratio Analysis
The limitations of ratio analysis are:
- Limitations of Accounting Data
- Ignores Price-level Changes
- Ignore Qualitative or Non-monetary Aspects
- Variations in Accounting Practices
- Forecasting based on historical analysis is not feasible
- Means and not the End
- Lack of ability to resolve problems
- Lack of standardized definitions
- Lack of universally accepted standard levels
- Ratios based on unrelated figures
Types of Ratios
The ratios are classified into two types, which are then broken down into various sub-segments:
- Traditional Classification– They are further classified into three types:
- Statement of Profit and Loss Ratios– A ratio of two variables from the statement of profit and loss is known as the statement of profit and loss ratio.
- Balance Sheet ratios– In case both variables are from the balance sheet, it is classified as balance sheet ratios.
- Composite Ratios– If a ratio is computed with one variable from the statement of profit and loss and another variable from the balance sheet, it is called a composite ratio.
- Functional Classification– They are further classified into four types:
- Liquidity Ratios– The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios.
- Solvency Ratios– The ratios calculated to measure solvency position are known as ‘Solvency Ratios.
- Activity or Turnover Ratios– This refers to the ratios that are calculated for measuring the efficiency of operations of a business based on the effective utilization of resources.
- Profitability Ratios– It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios.
To download the complete Revision Notes for CBSE Class 12 Accounting Ratios, click on the link below
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