Introduction to Accounting Ratios

Meaning of Accounting Ratios

Ratio simply means one number expressed in term of another.

Accounting ratio therefore is used to describe significant relationship between figures as shown on a balance sheet ,in a profit and loss account ,in budgetary control system or in any other aspects of accounting organization.

Accounting ratios thus shows the relationship between accounting data.

MARK-UP AND MARGIN

MARK-UP: It is the relationship between the profit and cost price of goods. The profit will be expressed as a percentage of the cost price.

The formula is \(\frac{\text{profit}}{\text{cost price}} \times 100\)

Mark-up can be converted to margin by adding the numerator to the denominator. This can be analysed thus

If mark-up is \(\frac{1}{5} \text{ or } 25\%\)

Margin \(= \frac{1}{5} + 1 = \frac{1}{6} \text{ or } 16.7\%\)

MARGIN: This is the profit expressed as a percentage of the selling price. The formula can be expressed thus

Margin \(= \frac{\text{profit}}{\text{selling price}} \times 100\)

Margin can be converted by deducting the numerator from the denominator.

If margin is \(\frac{1}{4} \text{ or } 25\%\)

Mark-up \(= \frac{1}{4} -1 = \frac{1}{3} \text{ or } 33 \frac{1}{3}\%\)

Example 1: Sola gives the following as at 31st December

Stock 1/12/10  N12,000

Purchases  N68,000

The mark-up on cost of sales is 25%.