FINANCIAL and MANAGEMENT ACCOUNTING

INTRODUCTION

ACCOUNTANCY
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.

ACCOUNTANCY
Accountancy is a branch of mathematical science that is useful in discovering the causes of success and failure in business. The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing. Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.

ACCOUNTANCY
Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in the Middle East. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced. Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone.

ACCOUNTANCY
Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information.

Management Accounting & Financial Accounting This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors

Management Accounting & Financial Accounting Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, ownermanagers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions.

Management Accounting & Financial Accounting Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP .

ACCOUNTANCY

EVOLUTION

DOUBLE-ENTRY BOOKKEEPING
Double-entry bookkeeping has been considered a fundamental innovation and a cornerstone of Capitalism by such thinkers as Werner Sombart and Max Weber. Sombart wrote in "Medieval and Modern Commercial Enterprise" that: "The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts."

DOUBLE-ENTRY BOOKKEEPING
Double-entry bookkeeping is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different accounts. It was first codified in the 15th century. In modern accounting this is done using debits and credits within the accounting equation: Equity = Assets - Liabilities. The accounting equation serves as a kind of error-detection system: if at any point the sum of debits does not equal the corresponding sum of credits, an error has occurred. Since several different types of errors result in equal sums for debits and credits, double-entry accounting is not a guarantee that no errors have been made.

DOUBLE-ENTRY BOOKKEEPING
Timeline
Century 12th DEVELOPMENT STAGE Taces of the double-entry system in the accounting of the Islamic world from at least the 12th century. The earliest extant records that follow the modern double-entry form are those of Amatino Manucci, a Florentine merchant at the end of the 13th century. Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century. By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca Pacioli, a monk and collaborator of Leonardo da Vinci, first codified the system in a mathematics textbook of 1494. Pacioli is often called the "father of accounting" because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.

13th

14th

15th

DOUBLE-ENTRY BOOKKEEPING
Accounts

An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial Transaction Flows encompass primarily inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets, liabilities, and equity.

DOUBLE-ENTRY BOOKKEEPING
Accounts Within these primary groups each distinctive asset, liability, income and expense is represented by its respective "account". An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financialposition elements on completion of the time period.

DOUBLE-ENTRY BOOKKEEPING
Accounts Items in accounts are classified into five broad groups, also known as the elements of the accounts: Asset, Liability, Equity, Revenue, Expense. The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.

DOUBLE-ENTRY BOOKKEEPING
Accounts Accounts are basically classified into two categories personal and impersonal which are further sub-divided as under: Personal Impersonal
Classification of accounts

1. Natural Personal Accounts 2. Artificial Personal Accounts 3. Representative Personal Accounts

1. Real Account 2. Nominal Accounts 3. Valuation Accounts

Types of Accounts
Type Represent Examples

Individuals or natural persons like Mr. Aditya, Mr. Vijay, Mrs. Reena, etc. Artificial Persons like Partnership Firms, Corporate entities, Organizations, for e.g. Reliance Industries Ltd., Cipla Ltd., Bank of India, etc Representative Personal Accounts, like debtors account, creditors account, outstanding expenses account, etc

Business Personal and Legal Entities

Types of Accounts
Type Represent Examples

Real

Tangibles - Plant and Properties & Assets of Machinery, Furniture and Fixtures, Stock, goods, Business , some physically tangible things and some Computers, Information intangible things not Processing Equipment etc. having any physical Intangibles - Goodwill, Patents ,trade marks, brand names existence Copyrights, etc

Types of Accounts
Type Represent Examples
Sales Account, Purchases Account, Interest Account, Discount Account, Commission Temporary Income and Expenditure Account, Salary Account, Wages Account, Accounts for recognition of the Electricity Charges, etc. Sales Account, implications of the financial Purchases Account, Interest Account, transactions during each fiscal year Discount Account, Commission Account, till finalisation of accounts at the end Salary Account, Wages Account, Electricity Charges, etc.

Nominal

These accounts are concerned with Valuation and provisions Valuation made against different kinds of assets.

Provision for depreciation accounts, Provisions for doubtful debts etc.

Types of Accounts
Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account). Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.

Types of Accounts
Account types (periodicity of flow)
The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year. Income is immediate inflow during the fiscal year. Expense is the immediate outflow during the fiscal year. An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows. Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent un-amortised expense. Alternatively, a liability could be valued at the present value of future outflows.

Debits and credits

Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true: assets = liabilities + equity For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage.

Debits and credits

Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account.

Debits and credits

Golden Rules of Accounting Personal Account Real Account Debit the receiver Credit the Giver Debit what comes in Credit what Goes Out Debit all Expenses & Losses Credit all Gains & Incomes Debit the A/c when the account is to be Reduced Credit the A/c when the account is to be Increased

Nominal Account

Valuation Account

Debits and credits

 Debit: A debit is recorded on the left hand side of a [T account]. it can also be defined as increase in asset and expenses while decrease in liability, revenue and capital. Credit: A credit balance is recorded on the right hand side of a 'T' account Credit can also be defined as increase in liability, revenue and capital and decrease in assets and expenses. Debit accounts = Asset and Expenses (also debit money received into bank accounts) Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)

Accounting entries
Accounting entries The double-entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries. Any accounting entry in the double-entry accounting system has two effects: one of increasing one account, the other of decreasing another account by an equal amount. If the accounting entries are recorded without error, at any point in time the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances.

Accounting entries
Accounting entries The double-entry bookkeeping system ensures that the financial transaction has equal and opposite effects in two different accounts. Accounting entries use terms such as debit and credit to avoid confusion regarding the opposite effect of the accounting entry e.g. If an accounting entry debits a particular account, the opposite account will be credited and vice versa. The rules for formulating accounting entries are known as "Golden Rules of Accounting". The accounting entries are recorded in the "Books of Accounts".

Books of accounts
It does this by ensuring that each individual financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system. The two entries have equal amounts and opposite signs, so that when all entries in the accounts are summed, the total is exactly the same: the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit record" (Dr.) in one account, and a "credit record" (Cr.) entry in the other account. The debit entry will be recorded on the debit side (left-hand side) of a nominal ledger account and the credit entry will be recorded on the credit side (right-hand side) of a nominal ledger account.

Books of accounts
Books of accounts A nominal ledger has a Debit (left) side and a Credit (right) side. If the total of the entries on the debit side is greater than the total on the credit side of the nominal ledger account, that account is said to have a debit balance. An example of an entry being recorded twice for doubleentry bookkeeping would be a supplier's invoice for stationery costing $100. The expense or Debit entry is Stationery Nominal Ledger a/c $100 Dr (showing that $100 has been spent on stationery) and the Credit entry is to the Supplier's Control Nominal Ledger a/c $100 Cr (showing that we now owe the supplier $100). This transaction has now been recorded twice in the financial accounting system and the total value is $100 for both Debit and Credit values.

Books of accounts
Books of accounts Double entry is used only in nominal ledgers. It is not used in daybooks, which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct). The double entry system uses nominal ledger accounts. From these nominal ledger accounts a Trial balance can be created.

Books of accounts
Books of accounts The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column. From the Trial balance the Profit and Loss Statement and the Balance Sheet can then be produced. The Profit and Loss statement will contain nominal ledger accounts that are Income or Expense type nominal ledger accounts. The Balance Sheet will contain nominal ledger accounts that are Asset or Liability accounts.

Bookkeeping process
Bookkeeping process The bookkeeping process refers primarily to recording the financial effects of financial transactions only into accounts. In manual accounting system there is latency ] (delay)between the recording of the financial transaction and its posting in the relevant account. (This delay is absent in electronic accounting systems due to instantaneous posting into relevant accounts) This delay gives rise to primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for recording the immediate effect of the financial transaction.

Bookkeeping process
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach.

Bookkeeping process
After a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. For example the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money) and a credit entry might be made in the account for "Sale of Item Class" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account.

Bookkeeping process
As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree this agreement is not by chance - because under the doubleentry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made either in the journals or during the posting process. The error must be located and rectified.

Bookkeeping process
Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule. For example, the "Inventory" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements.

Bookkeeping process
STEPS IN ACCOUNTING CYCLE Journals- Journal entries Combined Journal entries Good A/c classification- Purchase- Sales Purchase ReturnsSales returns Stock Journal is sub divided into eight Subsidiary Books Purchase Book- Sales Book Purchase Return Book Sales return Book Cash Book Bills Receivable Book Bills Payable book Journal Proper. Ledger Posting

Bookkeeping process
STEPS IN ACCOUNTING CYCLE (Continued) Balancing of an Account Trial Balance Debit and Credit sides of a Trial Balance Classification of Expenses into Revenue Expenses- Capital Expenses- Deferred Revenue Expenses Classification of Receipts Capital Receipts- Revenue Receipts Valuation of Inventories Depreciation Accounting- Methods of charging depreciation Preparation of Final Accounts- Trading Accounts (for the period)- profit & Loss Account (for the period) - Balance Sheet as at .

Bookkeeping process
Finally financial statements are drawn from the trial balance, which may include: the income statement, also known as the statement of financial results, profit and loss account, or P&L the balance sheet, also known as the statement of financial position the cash flow statement the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity

ACCOUNTANCY

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING
In Management Accounting, accounts are classified, summarized, analyzed and presented in such a manner that all valuable information may be made available to the managers. It facilitates managers to take suitable decision. For attaining the goals, the managers get help from various techniques of management accounting such as Marginal Costing, Standard Costing, Ratio Analysis, Budgetary Control etc. Although most management accounting techniques were developed years before, it was only in 1950, that the term Management Accounting came into practice following an Anglo American Productivity Council Meeting. In India, this has emerged as a discipline more recently.

MANAGEMENT ACCOUNTING
Definitions:
According to the Anglo American Council of Productivity Management Accounting is the presentation of accounting information in such a way as to assist the management in the creation of policy and the day-to-day operation of an undertaking The Institute of Chartered Accountants, England defines Management Accounting as any form of accounting which enables a business to be conducted more efficiently The Institute of Chartered Accountants of India defines Management Accounting as such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting

MANAGEMENT ACCOUNTING
OBJECTIVES OF MANAGEMENT ACCOUNTING: The fundamental objective of management accounting is to enable the management to maximize profits or minimize losses. The evolution of management accounting has given a new approach to the function of accounting. The main objectives of management accounting are as follows: 1. Planning and policy formulation: Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the programme of activities. Management accounting can help greatly in this direction. It facilitates the preparation of statements in the light of past results and gives estimation for the future.

MANAGEMENT ACCOUNTING
OBJECTIVES OF MANAGEMENT ACCOUNTING: 2. Interpretation process: Management accounting is to present financial information to the management. Financial information is technical in nature. Therefore, it must be presented in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc. 3. Assists in Decision-making process: With the help of various modern techniques management accounting makes decision-making process more scientific. Data relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed and provides a base for taking sound decisions.

MANAGEMENT ACCOUNTING
OBJECTIVES OF MANAGEMENT ACCOUNTING: 4. Controlling: Management accounting is a useful for managerial control. Management accounting tools like standard costing and budgetary control are helpful in controlling performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting. 5. Reporting: Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

MANAGEMENT ACCOUNTING
OBJECTIVES OF MANAGEMENT ACCOUNTING: 6. Facilitates Organizing: Return on Capital Employed is one of the tools of management accounting. Since management accounting stresses more on Responsibility Centres with a view to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficiently organization framework. 7. Facilitates Coordination of Operations: Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination

MANAGEMENT ACCOUNTING
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
Management accounting involves furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving the organizational goals. The following paragraphs discuss about the nature of management accounting. 1. Provides accounting information: Management accounting is based on accounting information. Management accounting is a service function and it provides necessary information to different levels of management. Management accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by accounting department is used for reviewing various policy decisions.

MANAGEMENT ACCOUNTING
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
2. Cause and effect analysis. The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; management accounting goes a step further. Management accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payables, share capital, etc. 3. Use of special techniques and concepts. Management accounting uses special techniques and concepts according to necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

MANAGEMENT ACCOUNTING
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
4. Taking important decisions. It supplies necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taken into account. 5. Achieving of objectives. Management accounting uses the accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can be taken at once with the help of budgetary control and standard costing.

MANAGEMENT ACCOUNTING
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
6. No fixed norms. No specific rules are followed in management accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most. 7. Increase in efficiency. The purpose of using accounting information is to increase efficiency of the concern. The performance appraisal will enable the management to pin-point efficient and inefficient spots. Effort is made to take corrective measures so that efficiency is improved. The constant review will make the staff cost conscious.

MANAGEMENT ACCOUNTING
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
8. Supplies information and not decision. Management accountant is only to guide and not to supply decisions. The data is to be used by the management for taking various decisions. How is the data to be utilized will depend upon the caliber and efficiency of the management. 9. Concerned with forecasting. The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTANT
Management Accountant is an officer who is entrusted with Management Accounting function of an organization. He plays a significant role in the decision making process of an organization. The organizational position of Management Accountant varies form concern to concern depending upon the pattern of management system. He may be an executive in some concern, while a member of Board of Directors in case of some other concern. However, he occupies a key position in the organization.

MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTANT
In large concerns, he is responsible for the installation, development and efficient functioning of the management accounting system. He designs the frame work of the financial and cost control reports that provide with the most useful data at the most appropriate time. The Management Accountant sometimes described as Chief Intelligence Officer because apart form top management, no one in the organization perhaps knows more about various functions of the organization than him. Tandon has explained the position of Management Accountant as follows: The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes the information and then returns the processed information back to where it came from .

MANAGEMENT ACCOUNTING

Functions of Management Accounting

rimary 1. Managerial Activities 2. Accounting Information

Secondary 1. rotection of Assets 2. Tax Determination 3. Fixation of Accountability 4. Financial lanning 5. Strategic Functions

MANAGEMENT ACCOUNTING
Scope of the subject.
The main aim of Management accounting is to help the management in its functions of planning, directing and controlling. Modern day Management Accounting has very large scope and uses different techniques to fulfill the needs of management. It comprises of

Financial Accounting, Ratio Analysis, Fund Flow Analysis, Cost Accounting Budgeting & Forecasting, Inventory Control, Management Reporting, Interpretation of Data, Statistical Methods, Internal Audit, Tax Accounting, etc

MANAGEMENT ACCOUNTING
RATIO ANALYSIS Ratio analysis is a method or a process by which the relationship of variables in financial accounting and especially of financial statements are computed, established and presented. It is an attempt to derive quantitative measures or guides concerning the financial position & profitability of a business enterprise. Ratio analysis can be used in trend as well as static analysis. A ratio is a figure expressed in terms of another figure. It is expressed by dividing one figure by other related figure. It can be percentage ratio, pure ratio, number of times, etc. It is shown as x/y or x:y or in percentage terms, (x/y) x 100.

MANAGEMENT ACCOUNTING
RATIO ANALYSIS
Ratios can be classified as

Balance Sheet ratios or Financial ratios, like ratios of Current Asset to Current Liabilities, Stock to Working Capital , etc Revenue Statement Ratio or Income Statement Ratio, like Net Profit to Sales, Expense to Sales, etc Composite Ratio or Inter- Statement Ratio or Combined Ratio, like Return on Capital employed, Return on Proprietor s fund, etc

MANAGEMENT ACCOUNTING
RATIO ANALYSIS Functional classification of ratios could be as under: Liquidity Ratio Leverage Ratio Activity Ratio, Profitability Ratio From the user s point of view the following ratios are more useful: For Shareholders Earning per share, Return on proprietor s fund, Short term creditors current and Liquidity ratios, Long term creditors and the management equity ratio etc