Chapter 5 of NCERT Class 12 Accountancy Part 2 focuses on Accounting Ratios, a topic that connects directly with real-life business analysis. Accounting ratios are mathematical tools used to evaluate a firm’s performance using its financial statements. This chapter covers various ratios like liquidity, profitability, solvency and activity ratios, all of which are useful for interpreting a company’s financial health.
I am writing this post because many students find the topic easy to remember but hard to apply in exam questions. The main challenge is not the formulas, but understanding what each ratio actually tells us. For example, the current ratio looks simple, but it only becomes meaningful when you know what a high or low value implies. Learning this chapter with proper examples and usage can make a big difference in your board exam marks. Also, these ratios are useful if you’re planning to take up commerce-related courses after Class 12, as they come in subjects like Financial Management and Business Studies too.
Understanding Accounting Ratios – Chapter Summary
Accounting ratios help in analysing the data from a company’s financial statements. They help us answer questions like:
- Can the company repay its short-term debts?
- Is it making good profits?
- Is it using its resources efficiently?
There are four main categories of ratios you need to learn:
1. Liquidity Ratios
These ratios help us check the company’s short-term financial health. In simple terms, they show whether a company has enough cash or assets to pay off immediate liabilities.
- Current Ratio = Current Assets / Current Liabilities
- Ideal ratio: 2:1
- Quick Ratio = (Current Assets – Inventories) / Current Liabilities
- Also called acid test ratio. Ideal is 1:1.
2. Solvency Ratios
These ratios show whether the company can pay its long-term debts.
- Debt to Equity Ratio = Total Long-term Debt / Shareholder’s Equity
- Total Assets to Debt Ratio = Total Assets / Long-term Debt
A higher debt can be risky if profits are not stable.
3. Activity Ratios
These ratios show how efficiently the company is using its assets.
- Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
- Trade Receivables Turnover Ratio = Net Credit Sales / Average Trade Receivables
They are helpful to see how fast stock is being sold and how quickly payments are collected.
4. Profitability Ratios
These show how much profit the company is making from its sales or capital.
- Net Profit Ratio = (Net Profit / Revenue from Operations) × 100
- Return on Investment (ROI) = (Net Profit before Interest and Tax / Capital Employed) × 100
These ratios are very important for investors and owners.
Download PDF – NCERT Class 12 Accountancy Part 2 Chapter 5
For easy offline revision, you can download the full chapter in PDF format from here.
