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ACC 205 Week 1 Balance Sheet Journal

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ACC 205 Week 1 Balance Sheet Journal
ACC 205 Week 1
Balance Sheet Journal

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ACC 205 Week 1 Balance Sheet Journal
Balance Sheet Ratios
Balance sheet ratios
The important ratios that arise from the Balance Sheet include working
capital, liquidity, net worth, debtors turnover, return on assets and return
on investment.
Working capital ratio
This ratio is also known as "the current ratio", and is one of the best-
known measures of financial strength. The main question this ratio
addresses is: "Does your business have enough current assets to meet
the payment schedule of its current debts with a margin of safety for
possible losses in current assets, such as stock shrinking or
uncollectable debtors?"
A generally acceptable current ratio is 2:1; but whether or not a specific
ratio is satisfactory, depends on the nature of the business and the
characteristics of its current assets and liabilities. The minimum
acceptable current ratio is obviously 1:1 but that relationship is usually
playing it too close for comfort.
Because there is a time lag between paying for materials and labour
used to produce your goods and the receipt of the cash for those goods,
the business needs money to fund its day-to-day operations. This money
is referred to as working capital and is represented by the difference
between current assets and current liabilities.
The formula for working out your working capital ratio is as follows:

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