### ZIMSEC O Level Principles of Accounts Notes: Introduction to Accounting Ratios

#### Introduction to ratios in Accounting

• Often in business numbers given in isolation are difficult to interpret
• For example Business A makes a profit of $10 000 while Business B makes a profit of$10 million
• It would be difficult to know which business better between the two
• Those new to Accounting and Finance in general might be tempted to say Business B at a glance
• To disprove this notion consider for example that Business A has a Capital Employed of $5 000 while Business B has a Capital Employed of$10 billion
• Clearly Business A was more successful in utilising its capital compared to Business B
• To help and analyse and interpret accounting data Accountants make use of ratios
• Ratio-is a result of one number when it is divided by another
• Ratios can be expressed:
1. As a percentage for example 10%
2. As a fraction $\frac{10}{100}$
3. As a decimal e.g 0.10
4. In traditional ration/scale format e.g. 10:100
5. In words ten as to one or even one in ten
• Ratios are commonly used to:
1. interpret accounting information,
2. analyse accounting information,