Accounting and Accounting ratios for Food Business : Beginners insight
Khurram Ali Mubasher, MSc, ACMA, CGMA, CPA
Shaping future leaders in Accounting & Finance | 12+ Years Corporate Experience | Associate CIMA & CPA | Educator | Sentiment Analysis Enthusiast
Accounting is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions.
Accounting measures, such as financial statements, provide a snapshot of a business's financial health and performance. Whereas accounting ratios, which are calculated using data from financial statement, provide insights into a business's liquidity, profitability, and solvency.
Lets discuss more with an example of a food vendor, called "O-Keto" that specialized in homemade keto goods. The owner, Aiman, was passionate about baking and had always dreamed of owning her own business. However, she quickly realized that running a business was not just about baking delicious treats, but also about managing finances.
Aiman knew that she needed to keep track of her financial transactions, so she hired an accountant to help her set up an accounting system. The accountant taught Aiman how to record her revenue and expenses, and how to prepare financial statements such as an income statement and a balance sheet.
Aiman soon realized that financial statements were not just boring numbers, but they provided valuable information about her business. The income statement showed her how much revenue her business was generating, and how much money was left after subtracting expenses. The balance sheet showed her how much money she had in assets, and how much money she owed in liabilities.
However, Aiman wanted more information than just the raw numbers. She wanted to know if her business was profitable, if she had enough cash to pay her bills, and if she was able to pay off her debts. This is where accounting ratios came in.
Aiman's accountant explained that accounting ratios were calculated using financial statement data, and they provided insights into a business's liquidity, profitability, and solvency. The most popular ratios for her food business included the current ratio, gross profit margin, and debt-to-equity ratio.
The current ratio measures a business's liquidity, which is its ability to pay its short-term obligations. To calculate the current ratio, Aiman divided her current assets by her current liabilities. A ratio of 1.5 or higher indicated that her business had enough liquidity to pay its bills.
The gross profit margin measures a business's profitability, which is its ability to generate a profit from its sales. To calculate the gross profit margin, Aiman subtracted the cost of goods sold from her revenue and divided the result by her revenue. A ratio of 40% or higher indicated that her business was generating a decent profit.
The debt-to-equity ratio measures a business's solvency, which is its ability to pay off its long-term debts. To calculate the debt-to-equity ratio, Aiman divided her total business liabilities by her total business equity. A ratio of 1 or less indicated that her business was able to pay off its debts.
Aiman found that her current ratio was 1.8, her gross profit margin was 45%, and her debt-to-equity ratio was 0.8. She was pleased to see that her business was liquid, profitable, and able to pay off its debts. She realized that by using accounting measures and ratios, she was able to make more informed decisions about how to grow her business.
In conclusion, accounting is an essential tool for managing a business, and accounting measures and ratios provide valuable information about a business's financial health and performance. By understanding and using these tools, Aiman was able to grow her business "O-Keto" and achieve her dream of being a successful entrepreneur.
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2 年The debt to equity and gross profit ratio above 40% is indicating that the business was in good state as it was able to generate profit. The current ratio also indicated that the business was doing well. Accounting ratios will help Aimen to analyze the company's financial status and take decisions according to it since ratios help to look at the financial condition of the business and without it, it would be difficult to take financial decisions which are suited best for the business and for generating profit.
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2 年A debt-to-equity ratio of 40% or higher suggested that the company was turning a respectable revenue and shows the business's ability to pay down long-term debts. The current ratio of the aiman corporation shows that the business was doing well. Accounting ratios will allow Aimen to predict the company's financial status and perform any financial task or business deal with ease since she will be able to see clearly how well the company is doing and what changes she has to make to increase productivity. The lack of accounting ratios will make analyses for decision-makers difficult, and owners won't be able to choose the best decisions?of businesses.
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2 年Aiman's business's current ratio indicates that it was in a better shape than its gross profit margin, which indicates the potential to earn a profit from its sales ratio. She was better informed to build the business, but we can also see from historical transaction data that we cannot forecast the future.
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2 年Aiman's company's current ratio suggests that it was in a better situation than it was at the time. Gross profit margin indicates the company's capacity for profit-making from its sales ratio. Although we can also look at this and see that we cannot forecast the future from prior transaction records, she was more knowledgeable about expanding business.
Research Analyst at Standard Capital Securities Pvt Ltd
2 年The debt to equity ratio indicates the company's capacity to pay off long-term debts, and a ratio of 40% or higher indicated that the company was making a respectable profit. The Aiman company's current ratio indicates that the company was in good health. She was able to make better decisions about how to expand her business by using accounting measures and ratios. However, we can also look into this and see that because accounting records businesses' past transactions, we cannot predict their future based on these records. A ratio of less than one indicated that the company could pay its debts.