SS1 Second Term Financial Accounting Lesson Note – Simple Accounting Ratios

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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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