Q.Are financial expenses included to determine operating ratio?
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Operating Ratio — A First Look
Think of a shopkeeper who earns ₹100 from sales. She spends ₹70 on buying goods, ₹15 on salaries and rent, and ₹5 on electricity. That leaves her with ₹10 as profit. Now ask: how much of every ₹100 sale is eaten up by her normal business operations? The answer is ₹90 (₹70 + ₹15 + ₹5). That 90% is her Operating Ratio.
In everyday language, the Operating Ratio tells you: "Out of every rupee of revenue from operations, how many paise go toward running the business?" The lower this ratio, the more efficient the business — because a smaller share of revenue is consumed by operating costs.
Precise Meaning (NCERT Definition)
The Operating Ratio is a profitability ratio that measures the proportion of Operating Cost to Revenue from Operations (Net Sales).
Operating Ratio=Revenue from OperationsOperating Cost×100
Where:
- Revenue from Operations = Net Sales (Gross Sales − Sales Returns)
- Operating Cost = Cost of Revenue from Operations + Operating Expenses
Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses − Closing Inventory
(For a trading firm, this is simply Cost of Goods Sold.)
Operating Expenses include:
- Office and administrative expenses (rent, salaries, insurance)
- Selling and distribution expenses (advertising, commission, carriage outward)
- Depreciation on fixed assets used in operations
Non-operating items are excluded. Do NOT include:
- Interest on loans (financial cost)
- Loss on sale of fixed assets
- Donations or charity
- Dividend paid
- Income tax
Why It Matters
A high Operating Ratio (say, above 90%) means the business has very thin margins from its core operations. A low ratio (say, 70%) indicates strong operational efficiency — more revenue is left as operating profit.
Managers use it to:
- Compare efficiency over time (trend analysis)
- Benchmark against competitors
- Identify where costs are rising out of control
Investors and creditors watch it because a rising Operating Ratio often signals trouble before net profit falls.
Accounting Treatment — Which Account is Debited/Credited?
The Operating Ratio is not a journal entry. It is a ratio computed from the Profit & Loss Statement. No account is debited or credited for the ratio itself.
However, the components that go into the ratio are recorded in the usual way:
| Component | Journal Entry (Debit/Credit) |
|---|---|
| Purchases | Debit Purchases A/c, Credit Cash/Supplier A/c |
| Salaries | Debit Salaries A/c, Credit Cash/Bank A/c |
| Depreciation | Debit Depreciation A/c, Credit Accumulated Depreciation A/c |
| Revenue from Operations | Debit Cash/Bank/Debtors A/c, Credit Revenue from Operations A/c |
All these expenses and revenues are then transferred to the Profit & Loss Account at the end of the year. The Operating Ratio is simply a mathematical relationship between two figures already sitting in that account.
Proforma / Format (as per NCERT) …
The operating ratio measures only operating cost against sales; financial charges are outside operations. …
Financial expenses are excluded from the operating ratio, because the ratio measures only operating cost (cost of goods sold + operating expenses) as a percentage of net sales.
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating ratio = (Cost of goods sold + Operating expenses) ÷ Net sales × 100. …
Showing the 12 most recent of 20 on this concept.
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Operating ratio + __________? = 100
›Reveal solutionSolution
Operating ratio + Operating profit ratio = 100.
The operating ratio expresses operating cost (cost of revenue from operations + operating expenses) as a percentage of net sales, while the operating profit ratio expresses operating profit as a percentage of net sales. Since operating cost + operating profit together make up the whole of net sales (100%), the two ratios are compleme …
- CBSE 2026Set ANNUAL1 markMCQQ.“Higher the ratio, the more favourable it is.” This does not apply to,(a) Operating ratio(b) Net profit ratio(c) Stock Turnover ratio(d) All of these
›Reveal solutionSolution
'Higher is more favourable' does not apply to the operating ratio - option (a).
The operating ratio = (Cost of goods sold + Operating expenses) / Net sales x 100. It shows the proportion of sales absorbed by operating costs, so a lower operating ratio is favourable (it leaves a higher operating profit). Thus, unlike the net profit or stock turnover ratios (where …
- CBSE 2026Set ANNUAL1 markQ.Profit from sale of Land is ₹ 3,00,000. Will it increase operating profit? Give reason.
›Reveal solutionSolution
No, profit from sale of land will NOT increase operating profit.
Operating Profit is the profit earned from a company's normal, regular business/trading operations alone. Profit (or loss) on sale of a fixed asset such as land is a capital transaction, unrelated to the day-to-day operating activities of the business, and is non-recurring in nature. Hence, while computing Operating Profit from Net Profit, such non-operating gains are specifically EXCLUDED (deducted back out, since they were included in net profit but do not relate to operations). Including it …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is not included in operating expense?(a) Loss on sale of asset(b) Loss due to fire(c) Interest paid(d) All of the above
›Reveal solutionSolution
Loss on sale of asset, loss due to fire and interest paid are all non-operating/financial items, so none is an operating expense. Correct option: (d).
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating expenses = office/administrative, selling and distribution expenses tied to normal operations. …
- CBSE 2025Set MARCH1 markQ.Are financial expenses included to determine operating ratio?
›Reveal solutionSolution
Financial expenses are excluded from the operating ratio, because the ratio measures only operating cost (cost of goods sold + operating expenses) as a percentage of net sales.
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating ratio = (Cost of goods sold + Operating expenses) ÷ Net sales × 100. …
- CBSE 2025Set ANNUAL1 markMCQQ.Operating ratio is (A) Profitability ratio (B) Activity ratio (C) Solvency ratio (D) None of these
›Reveal solutionSolution
Operating ratio is a profitability ratio, so the answer is (A).
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Net Revenue from Operations x 100. It shows what proportion of sales is consumed by operating costs and therefore indicates the operating profitability of the business.
- It is not an activity ratio (B) — activity ratios measure turnover/efficiency of asset use. …
- CBSE 2025Set ANNUAL1 markQ.State whether True or False: High operating ratio is considered always better.
›Reveal solutionSolution
The statement is False.
Operating ratio = (Cost of revenue from operations + Operating expenses) / Revenue from operations x 100. It shows the proportion of sales consumed by operating costs. A lower operating ratio means a higher operating margin and bette …
- CBSE 2025Set ANNUAL1 markMCQQ.Higher the ratio, lower the profitability, is applicable to(a) gross profit ratio(b) operating ratio(c) net profit ratio(d) earning per share
›Reveal solutionSolution
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations × 100 — since it measures cost as a fraction of sales, a HIGHER ratio means LOWER profit margin, the opposite relationship to profitability ratios like Gross/Net Profit Ratio.
Most profitability ratios (Gross Profit Ratio, Net Profit Ratio, Earning Per Share) move in the SAME direction as profitability — a higher value means better profitability. The Operating Ratio is the exception: it is a cost ratio, computed as
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations × 100
…
- CBSE 2024Set ANNUAL1 markQ.What will be the Operating Profit Ratio if Operating Ratio is 82.38% ?
›Reveal solutionSolution
Operating Profit Ratio = 100% − Operating Ratio = 17.62%.
Relationship: Operating Ratio and Operating Profit Ratio are complementary — together they account for the whole of Revenue from Operations:
Operating Ratio + Operating Profit Ratio = 100%
Calculation:
Operating Profit Ratio = 100% − 82.38%
= 17.62%
…
- CBSE 2023Set 67/4/11 markMCQQ.If revenue from operations is ₹ 10,00,000 and gross profit is 25% on cost, cost of revenue from operations will be : (A) ₹ 2,50,000 (B) ₹ 12,50,000 (C) ₹ 2,00,000 (D) ₹ 8,00,000(OR)If the operating ratio of Aman Ltd. is 60%, its operating profit ratio will be : (A) 100% (B) 60% (C) 40% (D) 160%
›Reveal solutionSolution
Part (a): Cost of Revenue from Operations = ₹8,00,000 — option (D).
Part (b): Operating Profit Ratio = 40% — option (C).
Part (a) — Cost of Revenue from Operations
"Gross profit is 25% on cost" means the base of the percentage is cost: for every ₹100 of cost, gross profit is ₹25, so Revenue from Operations = ₹125. Therefore Revenue = 125% of Cost.
Cost of Revenue from Operations = Revenue ÷ 1.25 = ₹10,00,000 ÷ 1.25 = ₹8,00,000.
Verification: Gross profit = 25% of ₹8,00,000 = ₹2,00,000; Cost (₹8,00,000) + Gross profit (₹2,00,000) = ₹10,00,000 = Revenue from Operations. ✓ …
- CBSE 2023Set ANNUAL1 markMCQQ.Payment of Income tax is considered as (A) Direct expense (B) Indirect expense (C) Operating expense (D) None of these
›Reveal solutionSolution
Payment of income tax is a non-operating item/appropriation of profit, so it is none of a direct, indirect or operating expense.
Operating expenses are those incurred in the normal course of running the business (office and administrative, selling and distribution expenses). Direct expenses relate directly to production/purchase of goods. Income tax, however, is levied on the profit already earned and is excluded from operating cost whi …
- CBSE 2023Set ANNUAL1 markMCQQ.Which of the following is non-operating expense ? (A) Rent (B) Selling expense (C) Wage (D) Loss on sale of machine
›Reveal solutionSolution
Loss on sale of a machine is a non-operating expense; rent, selling expenses and wages are operating expenses.
Operating expenses are incurred in carrying on the regular business — rent, wages and selling expenses all fall here. A loss on sale of a fixed asset (machinery) is incidental and not part of day-to-day operations, so it is classified as a non-oper …
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