From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio. Balance Sheet as at March 31, 2017 | Particulars | Amount (₹) | | :--- | ---: | | **I. Equity and Liabilities** | | | 1. Shareholders' funds | | | a) Share capital | 10,00,000 | | b) Reserves and surplus | 7,00,000 | | c) Money received against share warrants | 2,00,000 | | 2. Non-current Liabilities | | | Long-term borrowings | 12,00,000 | | 3. Current Liabilities | | | Trade payables | 5,00,000 | | **Total** | **36,00,000** | | **II. Assets** | | | 1. Non-current Assets | | | Fixed assets – Tangible assets | 18,00,000 | | 2. Current Assets | | | a) Inventories | 4,00,000 | | b) Trade Receivables | 9,00,000 | | c) Cash and cash equivalents | 5,00,000 | | **Total** | **36,00,000** | Additional Information: Revenue from Operations ₹18,00,000.

From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii)

Numerical Questions · Q17

From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio.

Balance Sheet as at March 31, 2017

Particulars	Amount (₹)
I. Equity and Liabilities
1. Shareholders' funds
a) Share capital	10,00,000
b) Reserves and surplus	7,00,000
c) Money received against share warrants	2,00,000
2. Non-current Liabilities
Long-term borrowings	12,00,000
3. Current Liabilities
Trade payables	5,00,000
Total	36,00,000
II. Assets
1. Non-current Assets
Fixed assets – Tangible assets	18,00,000
2. Current Assets
a) Inventories	4,00,000
b) Trade Receivables	9,00,000
c) Cash and cash equivalents	5,00,000
Total	36,00,000

Additional Information: Revenue from Operations ₹18,00,000.

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Concept understanding — Liquidity Ratio Analysis

Liquidity Ratio Analysis – A First Look

Think of your own pocket money. You get ₹500 at the start of the month. You know you'll need to pay ₹200 for a bus pass, ₹150 for stationery, and ₹100 for a friend's birthday gift. That's ₹450 of definite expenses. You have ₹500 cash in hand. You can easily cover those payments. That's liquidity – your ability to meet short-term obligations as they fall due.

Now imagine you have a ₹10,000 fixed deposit that matures in two years, but you need ₹500 today. You can't break the FD easily without a penalty. That asset is not liquid enough for today's need. Liquidity is about timing – having cash or near-cash when the bill arrives.

The Precise Meaning in Accountancy

In a business, liquidity means the firm's ability to pay its current liabilities (debts due within one year) using its current assets (assets that can be converted into cash within one year). The two most important ratios from NCERT Class 12 (Part B, Chapter 5 – Accounting Ratios) are:

Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Acid Test Ratio) = Quick Assets / Current Liabilities

Where:

Current Assets include: Cash, Bank, Debtors, Bills Receivable, Inventory, Prepaid Expenses, Short-term Investments.
Current Liabilities include: Creditors, Bills Payable, Outstanding Expenses, Short-term Loans, Bank Overdraft.
Quick Assets = Current Assets – Inventory – Prepaid Expenses (because inventory takes time to sell, and prepaid expenses cannot be converted to cash).

Important

The ideal current ratio is 2:1 (₹2 of current assets for every ₹1 of current liability). The ideal quick ratio is 1:1. These are benchmarks, not rigid rules – a trading firm with fast-moving inventory can survive with a lower current ratio.

Why It Matters

A business that cannot pay its short-term debts is technically insolvent – even if it owns huge factories. Creditors, banks, and suppliers check these ratios before giving credit. A very high ratio (say 5:1) may mean idle cash or poor asset utilisation. A very low ratio (say 0.8:1) signals danger – the firm may default.

Watch out

A high current ratio is not always good. If it comes from slow-moving inventory or old debtors, the firm may still struggle to pay cash. That's why the quick ratio is a stricter test.

Accounting Treatment – No Direct Journal Entry

Liquidity ratios are not recorded in the books of accounts. They are calculated from the Balance Sheet for analysis. There is no debit or credit entry for a ratio. The treatment is purely analytical:

You take the Balance Sheet (prepared under Schedule III of Companies Act, 2013).
Identify current assets and current liabilities from the prescribed format.
Compute the ratios.

However, the components of these ratios do have accounting entries. For example, when you buy goods on credit:

Debit Purchases A/c
Credit Creditors A/c

This increases inventory (current asset) and creditors (current liability), affecting the current ratio. But the ratio itself is never journalised.

Format from NCERT – Balance Sheet Extract (Schedule III)

Below is the relevant part of the Balance Sheet format used to compute liquidity ratios. Only the current portions are shown.

Particulars	Note No.	Amount (₹)
ASSETS
1. Non-current Assets
(a) Property, Plant & Equipment	1	xxx
(b) Intangible Assets	2	xxx
2. Current Assets
(a) Inventories	3	xxx
(b) Trade Receivables	4	xxx
(c) Cash & Cash Equivalents	5	xxx
(d) Short-term Loans & Advances	6	xxx
(e) Other Current Assets	7	xxx
Total Assets		xxxx
EQUITY & LIABILITIES
1. Shareholders' Funds
(a) Share Capital	8	xxx

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Debt-Equity Ratio = 0.63:1, Working Capital Turnover Ratio = 1.38 times, Trade Receivables Turnover Ratio = 2 times.

Let’s begin with the concept. These three ratios are part of Liquidity and Solvency Analysis — they tell us how well the company can meet its short-term obligations, how efficiently it uses its working capital, and how quickly it collects cash from credit sales. The treatment is straightforward: each ratio is a simple fraction of two balance sheet or income statement figures. The key is to correctly identify which items belong to which category — especially for Debt-Equity, where shareholders’ funds include share capital, reserves, and share warrants (yes, share warrants are part of shareholders’ funds because they represent money received against future equity). For Working Capital Turnover, we need current assets minus current liabilities. For Trade Receivables Turnover, we use revenue from operations (which is net credit sales here, as no other sales are mentioned) divided by average trade receivables.

Now, let’s compute each ratio step by step.

(i) Debt-Equity Ratio

Formula:

Debt-Equity Ratio = Long-term Debt / Shareholders’ Funds

Step 1: Identify Long-term Debt

From the Balance Sheet, Non-current Liabilities: Long-term borrowings = ₹12,00,000.

There is no other long-term debt (e.g., debentures, long-term provisions). So, Long-term Debt = ₹12,00,000.

Step 2: Identify Shareholders’ Funds

Shareholders’ funds include:

Share capital: ₹10,00,000
Reserves and surplus: ₹7,00,000
Money received against share warrants: ₹2,00,000

Note

Share warrants are treated as part of shareholders’ funds because they represent advance money for future equity issuance. They are not a liability.

Total Shareholders’ Funds = 10,00,000 + 7,00,000 + 2,00,000 = ₹19,00,000.

Step 3: Compute Ratio

Debt-Equity Ratio = 12,00,000 / 19,00,000 = 0.6315… ≈ 0.63:1

Watch out

A common mistake is to include current liabilities (trade payables) in debt. Debt-Equity uses only long-term debt, not total liabilities.

(ii) Working Capital Turnover Ratio

Formula:

Working Capital Turnover Ratio = Revenue from Operations / Working Capital

Step 1: Compute Working Capital

Working Capital = Current Assets – Current Liabilities

Current Assets:

Inventories: ₹4,00,000
Trade Receivables: ₹9,00,000
Cash and cash equivalents: ₹5,00,000 Total Current Assets = 4,00,000 + 9,00,000 + 5,00,000 = ₹18,00,000

Current Liabilities:

Trade payables: ₹5,00,000 (No other current liabilities given.)

Working Capital = 18,00,000 – 5,00,000 = ₹13,00,000

Step 2: Revenue from Operations

Given as ₹18,00,000.

Step 3: Compute Ratio …

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