Calculate the 'Total Assets to Debt Ratio' from the fol — CBSE Class 12 Accountancy 2020 PYQ

Question

Calculate the 'Total Assets to Debt Ratio' from the following information :

Particulars	₹
Current Assets	11,00,000
Working Capital	6,50,000
Shareholder's Fund	7,50,000
Total Debt	19,50,000
Reserves and Surplus	2,50,000

OR Under which major head/sub-head will the following items be presented in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013 ? (i) Computer software (ii) Calls-in-advance (iii) Outstanding salary (iv) Securities Premium Reserve (v) Patents (vi) Interest accrued on Investment

CBSECBSE Class XII Board 2020Subjective· 3mImportance★★★★★

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Part (a)Concept understanding — Financial Ratio Analysis

Financial Ratio Analysis — A First Look

Think of a friend who runs a small shop. You want to know: Is the shop doing well? You could ask, "How much profit did you make?" But that single number doesn't tell you much. A profit of ₹50,000 sounds good — but what if the shop owner invested ₹10,00,000 of their own money? Suddenly that profit looks small. What if the shop owes ₹8,00,000 to suppliers? That changes the picture too.

This is where ratio analysis comes in. It takes two numbers from the financial statements and compares them. A ratio is simply one number divided by another. That comparison gives you a relative measure — not just "how much profit" but "profit relative to investment" or "profit relative to sales."

What Exactly Is Financial Ratio Analysis?

Financial ratio analysis is the process of calculating and interpreting ratios using data from the Balance Sheet and Statement of Profit and Loss (the P&L). These ratios help you evaluate a business's performance, financial health, and efficiency.

The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines it as: "the process of establishing meaningful relationship between items of the financial statements."

There are four main categories of ratios you will study:

Category	What it measures	Example
Liquidity ratios	Ability to pay short-term debts	Current ratio
Solvency ratios	Ability to pay long-term debts	Debt-equity ratio
Activity ratios	How efficiently assets are used	Inventory turnover ratio
Profitability ratios	How much profit relative to sales/investment	Gross profit ratio

Why Does It Matter?

A single absolute number — say, Net Profit of ₹2,00,000 — is almost meaningless without context. Ratio analysis gives you that context. It lets you:

Compare performance across years (trend analysis)
Compare one company with another in the same industry
Judge whether the business can meet its obligations
Identify strengths and weaknesses before they become crises

For example, if Current Assets are ₹5,00,000 and Current Liabilities are ₹2,50,000, the Current Ratio is 2:1. That is considered healthy. But if Current Liabilities were ₹5,00,000, the ratio would be 1:1 — a warning sign.

Accounting Treatment — What Gets Debited and Credited?

Here is a critical point: Ratio analysis itself does not involve any journal entry. You are not recording a transaction. You are analysing existing data. No account is debited or credited when you calculate a ratio.

However, the data used in ratio analysis comes from accounts that were debited and credited when transactions occurred. For instance:

Gross Profit Ratio uses Gross Profit (from the P&L) and Revenue from Operations (Net Sales). Gross Profit itself is the result of closing entries — debit Trading Account, credit P&L.
Current Ratio uses Current Assets (like Cash, Debtors) and Current Liabilities (like Creditors, Bills Payable). These balances exist because of past journal entries.

So while ratio analysis has no direct debit/credit, it draws entirely from the ledger balances that do.

Formats and Proformas You Need to Know

The NCERT textbook provides specific formats for the financial statements from which ratios are calculated. Here is the Statement of Profit and Loss format (as per Schedule III of the Companies Act, 2013) that you will use:

Particulars	Note No.	Amount (₹)
I. Revenue from Operations		xxx
II. Other Income		xxx
III. Total Revenue (I + II)		xxx
IV. Expenses:
Cost of Materials Consumed		xxx
Purchases of Stock-in-Trade		xxx
Changes in Inventories		xxx
Employee Benefit Expenses		xxx
Finance Costs		xxx
Depreciation and Amortisation		xxx
Other Expenses		xxx
Total Expenses		xxx
V. Profit before Tax (III – IV)		xxx
VI. Tax Expense		xxx
VII. Profit for the Period (V – VI)		xxx

And the Balance Sheet format (abbreviated):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital		xxx
(b) Reserves and Surplus		xxx
2. Non-Current Liabilities		xxx
3. Current Liabilities		xxx
Total		xxx
ASSETS

Part (b)Concept understanding — Balance Sheet Presentation

Balance Sheet Presentation – A First Look

Think of your own finances. You have some things you own – a phone, a bike, maybe some cash in your pocket. And you have some things you owe – maybe you borrowed money from a friend, or you have a pending fee payment. If you wrote down everything you own on one side and everything you owe (plus what's truly yours) on the other, you'd have a personal balance sheet.

That's exactly what a company does. The Balance Sheet is a snapshot of a business's financial position at a single point in time – usually the last day of the accounting year. It shows two sides that must always be equal:

Assets = Liabilities + Capital

This is the fundamental accounting equation. The Balance Sheet is not an account – it's a statement. It doesn't get debited or credited. It simply presents the balances of real accounts (assets) and personal accounts (liabilities) plus the capital account, after all transactions for the year have been recorded and the Profit & Loss Account has been closed.

Why Does It Matter?

The Balance Sheet answers three critical questions for anyone reading it – owners, banks, investors, tax authorities:

What does the business own? (Assets – from cash to machinery to buildings)
What does the business owe to outsiders? (Liabilities – loans, creditors, outstanding expenses)
What is the owner's stake? (Capital – the net worth)

If the Balance Sheet doesn't balance, something is wrong in the books. That's why it's the final check after preparing the Trial Balance and the Profit & Loss Account.

The Format (as per NCERT Class 12)

The Companies Act, 2013 prescribes a specific format for the Balance Sheet. It is divided into two sides:

Left Side (Liabilities + Capital)	Right Side (Assets)
1. Shareholders' Funds	1. Non-Current Assets

Share Capital | - Fixed Assets (Tangible & Intangible)
Reserves & Surplus | - Non-Current Investments
Money received against share warrants | - Long-term Loans & Advances 2. Share Application Money pending allotment | 2. Current Assets 3. Non-Current Liabilities | - Current Investments
Long-term Borrowings | - Inventories
Deferred Tax Liabilities (Net) | - Trade Receivables
Other Long-term Liabilities | - Cash & Cash Equivalents
Long-term Provisions | - Short-term Loans & Advances 4. Current Liabilities | - Other Current Assets
Short-term Borrowings |
Trade Payables |
Other Current Liabilities |
Short-term Provisions |

Note

This is the vertical format (also called the "order of liquidity" format) used by companies. For sole proprietors and partnerships, a simpler horizontal format is common, but the principle is identical.

Accounting Treatment – What Gets Debited/Credited?

The Balance Sheet itself is never debited or credited. It is a statement of balances. However, the items that appear on it come from accounts that were debited or credited during the year.

Here's how the major items originate:

Balance Sheet Item	Originates From	Debit/Credit Nature
Capital	Capital Account	Credit balance (owner's claim)
Reserves & Surplus	Profit & Loss Appropriation Account	Credit balance (undistributed profit)
Long-term Borrowings	Loan Account (e.g., Bank Loan)	Credit balance (liability)
Trade Payables	Creditors Account	Credit balance (amount owed)
Fixed Assets	Asset Account (e.g., Machinery A/c)	Debit balance (what the business owns)
Inventories	Stock Account	Debit balance (goods on hand)
Trade Receivables	Debtors Account	Debit balance (amounts due from customers)
Cash & Bank	Cash/Bank Account	Debit balance (positive cash)

Watch out

A common mistake: students think the Balance Sheet is "balanced" by making a journal entry. No – it balances because the accounting equation always holds. Every debit has a matching credit somewhere.

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Part (a): Total Assets to Debt Ratio = 1.8 : 1.

Part (b): the six items are classified under Schedule III as intangible assets, other current liabilities, reserves & surplus and other current assets as tabulated.

Part (a) — Total Assets to Debt Ratio

This is a solvency ratio showing how many rupees of total assets back each rupee of long-term debt.

Total Assets to Debt Ratio = Total Assets \div Debt (Long-term Debt)

Working Note 1 — Current Liabilities. Working Capital = Current Assets − Current Liabilities.

Current Liabilities = 11,00,000 − 6,50,000 = ₹4,50,000.

Working Note 2 — Total Assets. Total Assets = Total Equity & Liabilities = Shareholders' Funds + Total Debt = 7,50,000 + 19,50,000 = ₹27,00,000 (here "Total Debt" covers all outside liabilities, long-term plus current).

Working Note 3 — Long-term Debt. Debt for this ratio excludes current liabilities:

Long-term Debt = Total Debt − Current Liabilities = 19,50,000 − 4,50,000 = ₹15,00,000.

Working Note 4 — Ratio.

Total Assets to Debt Ratio = 27,00,000 ÷ 15,00,000 = 1.8 : 1. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 96 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. The Debt-Equity Ratio of a company is 2 : 1. Which of the following transactions will increase the Debt-Equity Ratio ? (A) Issue of Shares ₹ 2,00,000 (B) Issue of 8% Debentures ₹ 5,00,000 (C) Issue of Bonus shares ₹ 4,00,000 (D) Payment to Creditors ₹ 1,00,000$
›Reveal solutionSolution
Option (B) — Issue of 8% Debentures ₹5,00,000 — will increase the Debt-Equity Ratio from 2:1.

Concept: Debt-Equity Ratio

The Debt-Equity Ratio measures the relationship between a company's external liabilities (debt) and shareholders' funds (equity):
$\text{Debt-Equity Ratio} = \frac{\text{Total Debt (External Liabilities)}}{\text{Shareholders' Funds (Equity)}}$
A ratio of 2:1 means for every ₹1 of equity, the company has ₹2 of debt.

To increase this ratio, we need a transaction that either:

Increases debt while keeping equity constant, or

Decreases equity while keeping debt constant, or

Increases debt proportionately more than equity increases.

Let us assume the company currently has Debt = ₹2,00,000 and Equity = ₹1,00,000 (giving the 2:1 ratio). We will test each option.

Analysis of Each Transaction

(A) Issue of Shares ₹2,00,000

Accounting Treatment:

When shares are issued, Bank/Cash A/c is debited and Share Capital A/c (part of equity) is credited.

Effect:

Debt remains ₹2,00,000

Equity increases to ₹1,00,000 + ₹2,00,000 = ₹3,00,000

New Ratio:
$\frac{2,00,000}{3,00,000} = \frac{2}{3} = 0.67:1$
The ratio decreases from 2:1 to 0.67:1.

(B) Issue of 8% Debentures ₹5,00,000

Accounting Treatment:

When debentures are issued, Bank/Cash A/c is debited and Debentures A/c (a long-term liability, part of debt) is credited.

Effect:

Debt increases to ₹2,00,000 + ₹5,00,000 = ₹7,00,000

Equity remains ₹1,00,000

New Ratio:
$\frac{7,00,000}{1,00,000} = 7:1$
The ratio increases from 2:1 to 7:1.

Tip

Any issue of debentures, bonds, or long-term loans increases debt without affecting equity, thereby raising the Debt-Equity Ratio.

(C) Issue of Bonus Shares ₹4,00,000

Accounting Treatment:

Bonus shares are issued by capitalising reserves. General Reserve/Profit & Loss A/c is debited and Share Capital A/c is credited. Both accounts are part of shareholders' funds (equity).

Effect:

Debt remains ₹2,00,000

Equity remains ₹1,00,000 (internal transfer within equity — reserves decrease, share capital increases by the same amount)

New Ratio:
$\frac{2,00,000}{1,00,000} = 2:1$
The ratio remains unchanged at 2:1.

Watch out

Bonus shares do NOT bring in fresh capital. They merely convert one component of equity (reserves) into another (share capital). Total equity is unaffected, so the Debt-Equity Ratio does not change.

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CBSE 2026Set MARCH1 mark
$Q. Loans which are repayable within __________ months, are called as short-term borrowings.$
›Reveal solutionSolution

Loans repayable within 12 months are called short-term borrowings.

As per Schedule III of the Companies Act, 2013, a liability is classified as current if it is expected to be settled within twelve months from the reporting date. Borrowings meeting this condition are shown under Current Liabilities as short-term borrowings; borrowings repayable after twelve months are long-term (non-current) borrow …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. According to Indian Companies Act, 2013, the term "Sundry-creditor" has been replaced by which term? A) Trade receivables B) Trade payables C) Trade debtors D) Bills payables$
›Reveal solutionSolution
'Sundry Creditors' is now shown as 'Trade Payables' under the Companies Act, 2013 - option (B).

The revised Schedule III format modernised the balance-sheet terminology that RBSE / CBSE Class-12 Accountancy follows:

Sundry Creditors -> Trade Payables (option B). …
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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: Those Assets, which are realised within __________ months are called current assets. (12/24)$
›Reveal solutionSolution

Assets realised within 12 months are classified as current assets.

As per Schedule III of the Companies Act, 2013, an asset is treated as current if it is expected to be realised within twelve months after the reporting date (or within the firm's normal operating cycle, or is held primarily for trading, or is cash/cash equivalent). Ass …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Current liabilities include$
(a) Sundry creditors
(b) Outstanding expenses
(c) Bills payable
(d) All of these
›Reveal solutionSolution

All the listed items are current liabilities - option (d).

Current liabilities are obligations payable within a short period (normally one year). Sundry creditors (trade payables), outstanding expenses (expenses incurred but not yet paid) and bills payable (short-term promis …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. The Balance Sheet of a company is prepared according to which schedule of the Indian Companies Act 2013?$
(a) Schedule I
(b) Schedule II
(c) Schedule III
(d) Schedule V
›Reveal solutionSolution

Correct option: (c) Schedule III.

Section 129 of the Companies Act, 2013 requires every company to prepare its Balance Sheet in the vertical form prescribed in Schedule III of the Act. So th …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Office Building under construction which may take 3 to 4 years for completion will be shown under _______ in the Balance Sheet of the Company.$
(a) Intangible assets under development
(b) Capital work in Progress
(c) Non-Current Assets
(d) Work in Progress
(a) Intangible assets under development
(b) Capital work in Progress
(c) Non-Current Assets
(d) Work in Progress
›Reveal solutionSolution

Office Building under construction is shown under Capital Work in Progress (Option B).

'Capital Work in Progress' (CWIP) represents the cost incurred so far on fixed assets that are being constructed or installed but are not yet ready for their intended use. Since the office building here will take 3 to 4 more years to complete, it is not yet a usable (operational) fixed asset; it cannot be depreciated or classified as a completed Building. It is disclosed as a separate line under Non-current Assets → Fixed Assets → Capital Work in Progress, …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Profit before Interest and Tax is ₹ 3,00,000 and Interest ₹ 75,000. The Interest coverage Ratio is _______.$
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
›Reveal solutionSolution

Interest Coverage Ratio = 4 : 1 (Option A).

Interest Coverage Ratio = Profit before Interest and Tax (PBIT) ÷ Interest on Long-term Debt

= 3,00,000 / 75,000 = 4 times, i.e. 4 : 1

…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Under which Sub-head will "Patents and Trademark" appear in the Balance Sheet of a Company as per Schedule III of Company's Act, 2013 ?$
(a) Intangible Assets
(b) Tangible Assets
(c) Other Current Assets
(d) Other Non-current Assets
›Reveal solutionSolution

Patents and Trademarks are shown under the sub-head "Intangible Assets" (within Fixed Assets, under Non-Current Assets).

As per the Schedule III format of the Balance Sheet (Companies Act, 2013), the asset side is classified as follows:

II. Assets

1. Non-current Assets

  (a) Fixed Assets

    (i) Tangible Assets — Land, Building, Plant & Machinery, Furniture & Fixtures, Vehicles (assets with physical existence)

    (ii) Intangible Assets — Goodwill, Patents, Trademarks, Copyrights, Computer Software (assets with NO physical existence but having a long-term, identifiable value to the business)

    (iii) Capital Work-in-Progress

    (iv) Intangible Assets under Development

…

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CBSE 2025Set 67/6/11 markMCQ
$Q. There are two statements : Statement I : The balance in the Statement of Profit and Loss in the Balance Sheet of Samta Ltd. showed a deficit of ₹ 2,00,000 on 31.03.2023 and a surplus of ₹ 3,00,000 on 31.3.2024. ₹ 5,00,000 will be considered as profit earned during the year for preparing Cash Flow Statement. Statement II : On 31.03.2023 the goodwill account of Zeeta Ltd. showed a balance of ₹ 4,00,000 and on 31.03.2024 it showed a balance of ₹ 5,00,000. ₹ 1,00,000 will be considered as goodwill acquired during the year for the preparation of Cash Flow Statement. Choose the correct option from the following : (A) Both the Statements are true. (B) Both the Statements are false. (C) Statement I is true, Statement II is false. (D) Statement II is true, Statement I is false.$
›Reveal solutionSolution
Both Statement I, which calculates the profit earned during the year for Cash Flow Statement purposes, and Statement II, which identifies goodwill acquired during the year, are correct based on standard accounting principles.

Let's break down each statement to understand the underlying accounting concepts and their treatment in the preparation of a Cash Flow Statement.

Concept and Treatment

Statement I: Profit and Loss Balance for Cash Flow Statement

The Statement of Profit and Loss (P&L) balance shown in the Balance Sheet represents the accumulated profits or losses of the company up to that date. When preparing a Cash Flow Statement (CFS) using the indirect method, we need to determine the profit earned during the current year to arrive at the Net Profit Before Tax and Extraordinary Items. This figure is crucial because it forms the starting point for adjusting non-cash items and non-operating items to calculate cash flow from operating activities.

If the P&L balance shifts from a deficit (an accumulated loss, which is a debit balance) to a surplus (an accumulated profit, which is a credit balance), the profit generated during the year must have been sufficient to first cover the entire opening deficit and then create the closing surplus. The sum of these two amounts represents the total profit available for appropriation during the year.

Statement II: Goodwill Account for Cash Flow Statement

Goodwill is an intangible asset. An increase in the balance of any asset account, including goodwill, generally indicates that the asset has been acquired during the accounting period. In the context of a Cash Flow Statement, the acquisition of an asset (whether tangible like machinery or intangible like goodwill) is classified as a cash outflow under Investing Activities. This is because cash is used to purchase long-term assets that are expected to generate future economic benefits for the business. Conversely, a decrease in goodwill could be due to its amortisation (a non-cash expense) or its sale (a cash inflow).

Working Notes

Working Note 1: Calculation of Profit Earned During the Year (Statement I)

Opening Balance of Statement of Profit and Loss (as on 31.03.2023) = Deficit of ₹ 2,00,000 (This is a debit balance).

Closing Balance of Statement of Profit and Loss (as on 31.03.2024) = Surplus of ₹ 3,00,000 (This is a credit balance).

To calculate the profit earned during the year, we need to determine the total change from the opening deficit to the closing surplus.

Amount of profit required to cover the opening deficit = ₹ 2,00,000

Amount of profit required to create the closing surplus = ₹ 3,00,000

Total Profit Earned During the Year = ₹ 2,00,000 (to cover deficit) + ₹ 3,00,000 (to create surplus) = ₹ 5,00,000. …
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CBSE 2025Set MARCH1 mark
$Q. Under which head goodwill is shown in the balance-sheet?$
›Reveal solutionSolution
Goodwill appears under Non-current Assets, sub-head Fixed Assets — Intangible Assets, in a company's balance sheet (Schedule III).

In GSEB Class-12 Commerce Accountancy (Financial Statements of a Company):

Under the equity-and-liabilities/assets format, goodwill is an intangible asset.

It is disclosed under Non-current Assets → Property, Plant & Equipment and Intangible Assets → Intangible Assets. …
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CBSE 2025Set MARCH1 mark
$Q. Give an example for non-current liabilities.$
›Reveal solutionSolution

Example of a non-current liability: long-term borrowings such as debentures or a long-term loan.

Under Schedule III of the Companies Act, 2013, non-current liabilities are those that do not fall due for payment within twelve months (or the operating cycle). They include long-term borrowings (debentures, bonds, long-term loans from banks/financial institutions), long-ter …

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Part (a) — Total Assets to Debt Ratio

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