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Gross Profit Percentage:

Formula:

Gross Profit
Sales
Your GP %

Gross Profit
Sales

100
1

10,000.00
100,000.00
10.00%

Gross Profit is Revenue less Cost of Sales i.e. Direct labour, materials.
Gross Profit Percentage shows what percentage profit we make on our revenue after
deducting all the variable costs all cost that directly relate to the sales.

Gross Profit is the contribution towards overheads of the business, e.g, for every 100,000 of Sales at a GP of 40%
there is a contribution of 40,000 to overheads of the business.
Because the Gross Profit Percentage includes only Cost of Sales (excluding overhead costs such
as marketing and sales, administration costs, finance costs, etc.) it is used to judge the profitability of the
product buying & selling process.
Gross Profit is an extremely important measure of profitability in any business

,000 of Sales at a GP of 40%,

e profitability of the

Current Ratio
Formula:

Current Assets
Current Liabilities

Current Assets

2.00

Current Liabilities

1.00

Your Current Test Ratio

Current Test Ratio is a liquidity ratio. It takes the total current assets: stock, debtors, bank, etc.,
and divides by total current liabilities for a period of time
The Current Test Ratio shows the extent to which amounts due and payable within 12 months are covered
by amounts which are received / receivable within the same time. As a rule of thumb a ratio of 2:1 or
above is an indication of liquidity. The higher the figure the better, as it shows increased liquidity, (cash availability)

btors, bank, etc.,

thin 12 months are covered


humb a ratio of 2:1 or
ncreased liquidity, (cash availability)

Stock Turnover
Formula: Stock Turnover Ratio =

Cost of Sales
Closing Stock

Cost of Sales

200.00

Closing Stock

200.00

Your Stock Turnover Ratio

Formula: Stock Turnover Days =

Closing Stock x 365


Cost of Sales

Closing Stock

300.00

Cost of Sales

200.00

Your Stock Turnover Days

547.5

Stock Turnover Ratio shows how many times a business has sold the value of closing
stock during the year. The higher this ratio the better as it shows that less cash is tied up in
stock. Also, it shows that business makes its profit from the stock quicker.
The Stock Turnover Days shows the average number of days that cash is tied up in stock. The
lower the days the better as the less cash tied up in stock, the more that is available for more
productive uses.

up in stock. The
lable for more

Acid Test Ratio


Formula:

Current Assets Closing Stock


Current Liabilities

Current Assets

2.00

Closing Stock

1.00

Current Liabilities

1.00

Your Acid Test Ratio

Acid Test Ratio is a liquidity ratio. It takes the total current assets debtors, bank stock, etc.
and subtracts stock and divides by total current liabilities. In some businesses stock may not be
readily convertible into cash. Therefore, the acid test ratio is a more prudent ratio, and is much more closely cash r
The Acid Test Ratio allows us to ascertain how liquid the company is. As a rule of thumb, a
ratio of 1:1 or above is an indication of liquidity (i.e. the company has sufficient assets to meet
its liabilities).

nk stock, etc.
stock may not be
io, and is much more closely cash related

assets to meet

Gearing Ratio:
Formula:

Debt
Equity

Your Loans

1.00

Issued share capital

1.00

Your Gearing Ratio

The ratio of debt to equity. The higher the ratio of debt to equity the more highly geared a
company is said to be. The debt:equity ratio suitable for a particular company will, to some extent,
depend on the nature of that business. Generally speaking, low risk businesses can afford higher
gearing than high risk businesses. Companies rarely make primary issues of shares, making use
of debt markets for ongoing financing needs; and to attract debt finance, corporates have to maintain
their creditworthiness, which is in part determined by the debt:equity ratio. A sufficient level of equity
capital is necessary to lessen the risk of default on debt obligations and to give a credit status high
enough to encourage those with funds surpluses to become creditors. Equity capital protects
lenders. This is the most explicit link between the debt and equity markets.

, to some extent,
an afford higher
ares, making use
es have to maintain
cient level of equity
credit status high
ital protects

Helpful Accounting Definitions

Accounts Payable: Accounts of money you owe. A liability that is usually created when you've made a purchase on credit.
Accounts Receivable: Accounts of money owed to you for the sale of goods or services.
Accrual basis: A method of accounting where transactions are recorded as they occur regardless of when payment for tha
Accrued Assets: Assets from revenues earned but not yet received.
Accrued Expenses: A liability incurred during the accounting period for which payment has not been made.
Accrued Income: Income earned during an accounting period but not received/recorded by the end of the period.
Aging: The grouping of like transactions by date. Example - sorting invoices by due date.
Adjusting Entries: Special accounting entries that are made when you close the books at the end of an accounting period t
Asset: Items that a business or individual owns or are owed.
Audit: The scrutinizing of accounting records and supporting documents for accuracy and completeness.
Audit trail: The information within the accounting system that reveals the effects of a transaction.
Bad Debt: An account or receivable that has been deemed unrecoverable and written-off.
Balance Sheet: A statement listing the total assets and liabilities; indicating the net worth of the company for the given time
Capital: The right to assets of the owner of a business..
Cash basis: An accounting method where transactions are recorded when the actual change of payment occurs, regardless
Certified Financial Statements: Financial statements that have been audited and certified by a Certified Accountant
Chart of accounts: A numerical listing of a businesss accounts.
Closing Entries: Journal entries made at the end of the period to return the balance in all accounts to zero and ready the a
Credit: An entry on the right side of an account - decreases assets or increases liabilities.
Debit: An entry on the left side of an account - increases assets or decreases liabilities.
Depreciation: The allocation of the cost of a tangible, long-term asset over its useful life.
Expenses: The daily costs incurred in running a business.
Fiscal: A 12 month accounting period. Not necessarily a calendar year.
General Ledger: The master record of all the balance sheet and income statement account balances.
Gross profit: The amount of net sales minus the amount of cost of sales
Income statement: A statement that summarises revenues and expenses.
Invoice: A form, sent from the seller to the buyer, listing the items bought, price, terms etc..
Issued Share Capital: The amount of authorised share capital that shareholders have actually subscribed to a company for
Journal: A chronological record of transactions, also known as the book of original entry.
Ledger: A book containing accounts to which debits and credits are posted from books of original entry.
Liability: A debt or obligation.
Net sales: The amount left when returns, discounts, and allowances are deducted from sales revenue.
Operating Expenses: The expenses that are incurred from the daily operation of the business.
Owners' equity: The owners' right to the assets of an entity.
Prepaid Expenses: Amounts that are paid in advance for product is not used up during the accounting period.
Post: The process of transferring amounts from a journal to the appropriate ledger accounts.
Purchase order: Written instructions to a vendor to ship and bill for the listed items.
Reversing Entry: An entry made to reverse a prior entry..
Trial Balance: A work sheet showing the balances in each account; used to prove the equality of debits and credits.