Classification of accounting ratios

The ratios can be classified as:

(i) Balance sheet or position statement Ratio
(ii) Profit and loss Account or profitability Ratio or Revenue Ratios
(iii) Composite or mixed Ratio

(i) Balance Sheet Ratio

Balance sheet ratio deals with the relationship between two balance sheet items both may be of liability side or may be of assets side. These ratios are always calculated either in proportion or time and never in percentage.

Example

For example:

Current ratio = Current Assets / Current liabilities

or ratio of fixed assets to current assets

Thus,

Fixed assets / Current assets

(ii) Profitability ratios

These ratios are always calculated in percentage and always on sales such as:

Goods Profit Ratio = (Goods Profit x 100) / Net Sales

Expense Ratio (Wages) = (Wages x 100) / Net Sales

Both the items of relationship must be from profit and loss account.

(iii) Mixed Ratio

These ratios are associated with one item of profit and loss item and the other from balance sheet thus these can be calculated in percentage or times.

Formula to calculate Mixed Ratio

Stock turn over ratio = Total sales / Debtors