Business ratios help the accountants to check whether business can meet certain demands, such as paying pay creditors back. It also calculates the business’s chance of survival; if they’ll go bankrupt or have enough money to progress. They also allow accountants to analyse the percentage change in the firm, whether it is decreasing or increasing. It also makes it easier to see where they need to improve and what is holding them down .
Elements that make up the balance sheet
It is made up by a statement of fixed assets, current assets and the liabilities.
Assets
These are resources that are owned by the company. They can be categorized either as fixed assets or current assets depending on how long they will be of value to the business.
Fixed Assets
Afixed assetan asset of a businessintended for continuing use, rather than a short-term, temporary asset such as stocks.
Current Assets
These are assets which a used in a short-term basis, whose value changes time to time. Example of currents assets: stock and trade debtors
Liabilities
These are amounts of money that a company owes others. This can include all kinds of obligations, like money borrowed from the bank, rent for use of a building and money owed to suppliers for material .These liabilities can be classed as either current liabilities or long-term liabilities.
Hill Systems ltd, Balance sheet

Hill systems ltd balance sheet consists of five headings, which are:
- Fixed assets
- Current assets
- Working capital
- Net assets
- Total capital
Stock
Stocks are current assets held for sale, or for processing and subsequent re-sale. They are owned by the business. On the 2007 balance sheet the stock is £135,000 and £354,000 on the following balance sheet.
Debtors
This is the money the business is owed. On the 2007 balance sheet it shows that Hill systems ltd is owed £400,000 and owed £675,000 in 2008.
Bank/cash
This is the business’s money which is in the bank or the cash box. In 2007 they had £373,000 and £40,000.
Creditors
This the money the business owes. In 2007 the owed £225,000 and £325,000 in 2008. It is separated from the current assets and put under as less current liabilities as it money the business is taking out and not keeping in the business.
Motor vehicles
They are used for business for transportation, furthermore for delivery and distribution. The business paid £145,000 and £140,000 in 2008 for these. Then after all the fixed assets are added up together.
Current assets
In Hill systems ltd the current assets are :
- Stock
- Debtors
- Bank/Cash
- Creditors
Fixed assets
In Hill systems ltd the fixed assets are :
- Land and premises
- Fixtures and fittings
- Motor vehicles
Land and premises
This is the money paid for the land the business is using and the amount of premises they have scattered. They paid £1105,000 in 2007 and £1366,000 in 2008.
Fixtures and fittings
These are lighting, electricity and telephones costs. They’re needed in a business for the business to be ran. They paid £115,000 in 2007 and £258,000 in 2008 for these.
Net assets employed
Shows how much the business’s assets are worth. This is found out by using this equation: Fixed assets + current assets net. They net assets employed is £2228,000 in 2007 and £2508,000 in 2008.
Working capital
This is amount of money available for the day to day running of the business. The working capital in 2007 is £863,000 and £744,000 in 2008. “Stock+ debtors+ bank/cash – creditors = Working Capital”
Owners capital
This is the money invested in the business by the owners. They invested £1300,000 in, in 2007 and £1618,000 in, in 2008.
Bank loan
Money the business owes the bank. They borrowed £610,000 in 2007 and £410,000 in 2008.
Net profit
They money the business has after all the expenses are deducted. Their net profit in 2007 is £318,000 and £480,000 in 2008.
Total capital employed
This is the is the amount of long-term money put into the business. The total capital employed is £2228 in 2007 and £2508 in 2008.
Purpose of Profit and Loss Account
The purpose of the profit and loss account is show whether a business has made aPROFITorLOSSover a financial year.
Hill systems ltd profits and loss accountant consists of five headings, which are:
- Sales
- Gross profit
- Less expenses
- Net profit
Sales
These are included under sales:
- Opening stock
- Add purchases
- Less closing stock
- Cost of goods sold
Opening stock
This the stock which was leftover from the previous year. It saves the business money as they’ll buy less stock. £250,000 worth of stock was leftover in 2007 and £315,000 was left over in 2008.
Sales
It shows how many sales the business made in a year. They made 4253 sales in 2007 and 5543 sales in 2008.
Add purchases
This is how much stock the business bought over the year. In 2007 add purchase was £1335,000 and £2225,000 in 2008.
Working out
The equation (Opening stock+ add purchases)- less closing stock, shows the cost of goods which were sold in particular year. In 2007 1270,000 goods were sold and 2186,000 were sold in 2008.
Gross Profit
This is the amount of money the business has made in a year before the expenses are deducted. The gross profit in 2007 was £2945,000 and £3348,000 in 2008.“Sales – Cost of goods sold = Gross profit”
Less closing stock
This is the amount of stock the business has leftover before beginning a new year. In 2007 they had £315,00 worth of stock and £354,000 in 2008.
Salaries
Money taken out to pay the employees. The salary in 2007 was £1875,000 and £2055,000 in 2008
Rent and rates
Money used to pay for the business’s premises and insurance. They paid £175,000 in 2007 and £187,000 in 2008
Leasing
The money used for renting i.e. trucks. In 2007 £105,000 was used and £118,000 in 2008.
Interest
Giving back the bank it’s money. They paid back £235,000 in 2007 and £239,000 in 2008
Stationary
This is the money spent on business cards, equipment for write documents. They spent £115,000 in on stationary and 118,000 in 2008
Maintenance
This is the money used to fix the business’s damaged products and keep the business healthy. They paid £97,000 in 2007 and the same in 2008.
Net profit
They money the business has after all the expenses are deducted. Their net profit in 2007 was £318,000 and £480,000 in 2008. The net profit worked out by using this equation:
Gross profit—total less expenses = net profit
Usefulness of accounting ratios:
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Simplifies financial statements:It simplifies the conception of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
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Helps in planning:helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications.
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Help in investment decisions:helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.
Liquidity ratio
Liquidity ratio is useddetermine a company's ability to pay off its-terms debts obligations.the higher the value of the ratio, thethe margin of safetycompany possesses to cover short-term debts.complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business. They measures the company’s ability to turn its assets into cash. These are especially important to creditors because they demonstrate how easily you can pay your bills.
There are two types of liquidity ratio:
Current Ratio
The current ratio measures the ratio of current assets to current liabilities. A current asset is an asset that can be quickly turned into cash, such as motor vehicles. A current liability is a debt that a business will be paying within the next year. This ratio shows the ability of the company to pay off its debts over the next year. A ratio of; shows you have twice as many current assets as current liabilities.
Formula: Current ratio formula : Current Assets / Current Liabilities
Acid Test
The acid test ratio, like the current ratio, measures the ability of your company to pay off its debt. The difference is that motor vehicle is not included as a current asset. Because turning your motor vehicle into cash is contingent on sales, the quick ratio shows the company’s ability to pay its debts if they were not able to sell the motor vehicle.
Acid Test ratio formula : Current Assets - Stock
Current Liabilities
There are there main accounting ratios. These are Liquidity, Profitability and Performance ratios. These are used to monitor the business, whether its going swiftly or unstable. They make it easy to identify financial issues before its too late for the business to act on the issues.
