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WEEK 9:
Topic: Simple Accounting Ratios
Contents:
- Mark-up
- Margin
- Rate of stock-turn or turnover
- Managers’ commission
Meaning of Accounting Ratios
Ratio simply means one number expressed in term of another.
Accounting ratio therefore is used to describe significant relationship between figures as shown on a balance sheet, in a profit and loss account, in budgetary control system or in any other aspects of accounting organization.
Accounting ratios thus shows the relationship between accounting data.
Sub-topic 1: MARK-UP AND MARGIN
MARK-UP: It is the relationship between the profit and cost price of goods. The profit will be expressed as a percentage of the cost price.
The formula is = profit/cost price x100
Mark-up can be converted to margin by adding the numerator to the denominator. This can be analyzed thus
If mark-up is 1/5 or 25%
Margin = 1/5+1 = 1/6 or 16.7 %
MARGIN: This is the profit expressed as a percentage of the selling price. The formula can be expressed thus
Margin =profit/selling price x100
Margin can be converted by deducting the numerator from the denominator
If margin is ¼ or 25%
Mark-up =1/4-1 = 1/3 or 33 1/3 %
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