Accounting Ratios: the Formula Is the Easy Part

The real difficulty is composition

A formula tells you to divide one thing by another. It does not tell you what counts as that thing, and that is the examinable part.

• Quick assets are not simply current assets. Items that cannot be turned into cash quickly come out. Students who subtract one of them and forget the other lose the mark without ever doubting their arithmetic.
• Current liabilities need care. What belongs in the denominator is a decision about each item, taken from the balance sheet in front of you rather than from a remembered list.
• Capital employed can be reached by more than one route. Both are acceptable when done consistently; mixing them inside one question is not.
• Revenue from operations, and the cost of it, are specific figures. They are not the same as total revenue, and turnover ratios go wrong immediately when the wrong one is picked up.

The useful classroom exercise is not more formulas. It is a balance sheet with the items listed, and the student sorting them into the buckets each ratio will need, before any dividing happens.

Units, and the marks lost on the last line

Some ratios are stated as a proportion, some as a number of times, some as a percentage. They are not interchangeable, and the unit is part of the answer. Writing a bare number where a proportion was wanted, or dropping the percentage sign, is enough to lose the final mark on a question that was otherwise entirely correct.

The presentation that protects marks is always the same: state the formula, substitute the figures, compute, and write the answer with its unit. Four short lines. Students who go straight to the answer are relying on the examiner reconstructing their thinking, and on a question worth a few marks that reconstruction may not happen.

Interpretation and the change questions

Two other question types cause trouble. The first asks what a ratio means. A single figure on its own says very little; it acquires meaning by comparison, with last year, with another firm, or with a conventional benchmark. Answers that simply restate the number in words earn little.

The second gives a transaction and asks whether a ratio will rise, fall or stay the same. The reliable method is mechanical, not intuitive: write the current numerator and denominator, apply the transaction to each, and compare. Students who reason it out in their heads get the easy cases right and the interesting ones wrong, and the interesting ones are the ones that get asked. A transaction that changes both parts of the ratio by the same amount is the standard trap, because whether the ratio moves depends on where it started.

A practice routine that works

Three short stages, and none of them is doing more sums. First, sort items from a real balance sheet into the components each ratio needs, with the book closed. Second, compute a small set of ratios from one statement, writing all four lines each time. Third, take ten transactions and predict the direction of change for a named ratio, then verify each one by computing before and after.

Half an hour a week through the year is more than enough, and it is considerably more effective than a long session the night before the exam, which tends to be spent copying formulas onto a sheet.

Arranging tuition in Gurgaon

We teach one-to-one at home across Delhi, Noida and Gurgaon, and live online anywhere. Ratios suit a shorter, regular slot better than a long one, since the work is repetitive and best done in small doses. In Gurgaon, where travel between sectors is long enough that tutors usually prefer fewer and longer visits, the practical answer is to attach this to a longer accountancy session rather than to book a separate short one, and to leave the weekly drill with the student to do alone.

Questions parents ask