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# Accounting Equation

Is a useful rule which helps when assembling the balance sheet figures. The rule which is always true is that: Assets - Liabilities =Capital Fixed Assets + Current Assets-Current Liabilities - Long term Liabilities = Capital + profit - drawings This means that when preparing a balance sheet there will always be two figures which are the same and we refer to this state as the the balance sheet balancing

Accounting ratios
Used to help make sense of the figures and include the following categories: Profitability ratios , used to compare the profitability of one company with another or of one company over time. Liquidity ratios, used to compare the liquidity of one company with another or of one company over time. Investment ratios, used by potential investors when making investment decisions. Efficiency ratios, used to compare company efficiency with others or with itself from one year to another. Accounting ratios are only useful when used to compare: one company's results over a period of time. one company's results with another company. It is best to compare with the best ,such as a world class company, or to compare with the industry standard for that type of business. the company's results with those expected. It is useful to use budgets for this purpose.

Accrual
An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated and then added to the expenses deducted from the profit in the Profit and Loss account. The same amount also needs to be added to Trade Creditors in the Current Liabilities section of the Balance sheet An item of value owned by the business

Balance Sheet A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot". Bank & Cash Amounts held in the bank and in cash. Found in the Current Assets section of the Balance Sheet. If the amounts are in deficit, then the bank account is said to be an overdraft and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet. Capital Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of: Share Capital (which comes in two varieties ordinary and preference)

## = Cost of Goods Sold = No of times Average Stock

5 Fixed Assets Turnover Ratio = Sales = No of times Fixed Assets at NBV 6 Debtor Collection Period = Average debtors x 365 = No of days Sales x 52 = No of weeks x 12 = No of months = Creditors Purchases = Sales Capital Employed x 365 = No of days x 52 = No of weeks x 12 = No of months = No of Times

## 7 Suppliers Payment Period

8 Asset Turnover

Liquidity Ratios 9 Current Ratio 10 Quick or Acid Test Investment Ratios 11. Gearing

## = Current Assets Current Liabilities

= Expressed as a Factor

= Current Assets - Stock [Also expressed as a Factor] Current Liabilities = Preference Shares + Long Term Loans X 100% Shareholders funds + Long Term Loans

A Note of caution: Ratio Analysis is all about comparing one set of ratios with another. This can mean comparing one year with another, or comparing the performance of one company with another or with its budgets. To achieve greater confidence in the conclusions you draw, you really need to compare more values than just two. You also need to bear in mind that there is some flexibility in the accounting treatments adopted by accountants when preparing the financial statements and so differences observed in performance might in part be due to differences in the way items have been treated in the accounts rather than differences in performance. Now test your understanding by attempting to calculate the net profit % from our own figures. First you need to know whether to examine the trading, profit and loss account or the balance sheet. If you make a mistake you may return here, for another try, by pressing your internet return button. You must return to this point in any event if you wish to take a peep at the answer The answers to the net profit ratio Net profit ratio = net profit x 100% = 200 = 10% sales 2000 This means that the business makes a net profit of 10% on it's sales. In other words it makes a profit of 10p for every 1 of sales. These figures can be found on the profit and loss account.