What is the meaning of ratio in accounting?

The term ratio is used to describe the relationships between figures in a balance sheet or in a profit and loss account or in a budgetary control system or in any other part of the accounting organization. The accounting ratio indicates the quantitative relationship which is used for analysis and decision making. It gives data for analysis of inter firm and intra firm comparison. A ratio is a quotient of two numbers and the relation expressed between two accounting figures is known as `accounting ratio’. Ratio analysis is a very powerful analysis tools useful for measuring performance of an organization. The ratio analysis concentrates on the internal relationship among the figures in financial statement. The analysis helps the management to make future projections on the basis of the past records.

“Ratio is a yardstick used to evaluate the financial condition and performance of a firm, relating two pieces of financial data to each other.” – James C. Van Harne

“The relation of one amount, a to another b, expressed as the ratio of a to b”. – Kohler

“Ratio is a fraction whose numerator is the antecedent and denominator the consequent.”

“Ratio is the relationship or proportion that one amount bears to another, the first number being the numerator and the later denominator.” – H.G. Guthmann

From the above definitions, we can clearly say that, “ratio is a relationship between two figures or factors or variables”. This relationship helps to analyze, interpretation and the financial condition of the firm. The accounting ratios indicate a quantitative relationship which is used for analysis and decision-making.

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