Q.'It is a technique which involves regrouping of data by application of arithmetical relationships.' Identify the technique and state its two advantages.

Let’s start with something you already know. Suppose you and a friend both run small shops. You each put in ₹1,00,000. At the end of the year, your shop made a profit of ₹20,000; your friend’s shop made ₹30,000. Which shop is doing better? The obvious answer is your friend’s — more profit. But what if your friend had to borrow ₹2,00,000 to earn that ₹30,000, while you used only your own ₹1,00,000? Suddenly, your shop looks more efficient. You are now thinking in ratios: profit relative to the money used.

That is the core of Ratio Analysis. It is not about raw numbers; it is about relationships between numbers. A ratio is simply one figure divided by another. In accounting, we use ratios to judge a business’s performance, financial health, and efficiency — without being misled by size.

What the NCERT textbook says

The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines Ratio Analysis as:

“Ratio Analysis is a technique of analysis of financial statements to assess the profitability, liquidity, solvency and efficiency of a business enterprise.”

It is a tool, not a separate account. You do not “debit” or “credit” a ratio. Ratios are calculated from the figures already recorded in the Trading and Profit & Loss Account and the Balance Sheet.

Why does it matter?

Three big reasons:

1. Comparison – You can compare a small firm with a large one, or the same firm over different years, because ratios cancel out size.
2. Decision-making – A bank deciding whether to give a loan looks at liquidity ratios. An investor looks at profitability ratios.
3. Early warning – A falling current ratio may signal trouble paying bills, even if profits look fine.

Accounting treatment: No debit/credit

This is a common confusion. Ratio Analysis is not a journal entry. You never write:

“Debit Ratio Analysis, Credit Profit & Loss Account”

That would be wrong. Ratios are computed after the final accounts are prepared. They are presented in a separate statement called a Comparative Statement or Common Size Statement, or simply listed in a report.

Where a format/proforma is given

The NCERT textbook gives a format for Comparative Balance Sheet and Comparative Statement of Profit & Loss. These are the main vehicles for ratio analysis. Here is the proforma for a Comparative Balance Sheet as per NCERT: