Accounting Ratio

Definition of an ‘Accounting Ratio’

An accounting ratio shows the relationship between one accounting number and another for the purposes of comparison.

For example suppose one business had revenue of 40,000 and gross margin of 20,000, and another business had revenue of 75,000 and gross margin of 28,000, without a ratio it is difficult to compare the two businesses.

However, if the accounting ratio of gross margin to sales (called the gross margin percentage) is calculated we get the following:

Gross margin percentage ratio for the first business = 20,000 / 40,000 = 50%, and
Gross margin percentage ratio for the second business = 28,000 / 75,000 = 37%

Using the accounting ratio we can see that the first business has the better gross margin percentage.

Accounting ratios should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in the same industry.

Template Accounting Ratio Definition

Various accounting ratios are shown on page two of the financial projections template and these can be used to monitor and control the operation of the business in comparison to similar businesses.

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